Do Hedge Funds Love Southwest Airlines Co. (LUV)?

In this article you are going to find out whether hedge funds think Southwest Airlines Co. (NYSE:LUV) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Southwest Airlines Co. (NYSE:LUV) has seen an increase in hedge fund interest in recent months. LUV was in 45 hedge funds’ portfolios at the end of March. There were 44 hedge funds in our database with LUV positions at the end of the previous quarter. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72% since March 2017 and outperformed the S&P 500 ETFs by more than 44 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Warren Buffett of Berkshire Hathaway

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the latest hedge fund action encompassing Southwest Airlines Co. (NYSE:LUV).

What have hedge funds been doing with Southwest Airlines Co. (NYSE:LUV)?

At Q1’s end, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 2% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LUV over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Southwest Airlines Co. (NYSE:LUV) was held by Berkshire Hathaway, which reported holding $1910.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $124.1 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and Holocene Advisors. In terms of the portfolio weights assigned to each position Water Street Capital allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 2.76% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, setting aside 2.64 percent of its 13F equity portfolio to LUV.

Consequently, some big names were breaking ground themselves. Sandbar Asset Management, managed by Michael Cowley, created the most outsized position in Southwest Airlines Co. (NYSE:LUV). Sandbar Asset Management had $3.9 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also made a $2.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Greg Eisner’s Engineers Gate Manager, Sara Nainzadeh’s Centenus Global Management, and Paul Reeder and Edward Shapiro’s PAR Capital Management.

Let’s now review hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). These stocks are DTE Energy Company (NYSE:DTE), Delta Air Lines, Inc. (NYSE:DAL), AmerisourceBergen Corporation (NYSE:ABC), and Chipotle Mexican Grill, Inc. (NYSE:CMG). This group of stocks’ market caps are closest to LUV’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.75 hedge funds with bullish positions and the average amount invested in these stocks was $1699 million. That figure was $2345 million in LUV’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand DTE Energy Company (NYSE:DTE) is the least popular one with only 29 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 7.9% in 2020 through May 22nd but beat the market by 15.6 percentage points. Unfortunately LUV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -18.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.