It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Southwest Airlines Co. (NYSE:LUV).
Southwest Airlines Co. (NYSE:LUV) was in 36 hedge funds’ portfolios at the end of September. LUV investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 33 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 Q3 rankings and see the video at the end of this article for Q2 rankings).
In today’s marketplace there are tons of indicators stock traders use to grade their holdings. A duo of the most innovative indicators are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the top fund managers can outclass their index-focused peers by a very impressive amount (see the details here).
Sander Gerber of Hudson Bay Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a peek at the recent hedge fund action surrounding Southwest Airlines Co. (NYSE:LUV).
Hedge fund activity in Southwest Airlines Co. (NYSE:LUV)
At Q3’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in LUV a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the largest position in Southwest Airlines Co. (NYSE:LUV). Berkshire Hathaway has a $2.8976 billion position in the stock, comprising 1.3% of its 13F portfolio. Coming in second is AQR Capital Management, managed by Cliff Asness, which holds a $204.3 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism encompass Brandon Haley’s Holocene Advisors, Renaissance Technologies and David E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 4.72% of its 13F portfolio. Water Street Capital is also relatively very bullish on the stock, earmarking 3.75 percent of its 13F equity portfolio to LUV.
As one would reasonably expect, specific money managers were breaking ground themselves. Holocene Advisors, managed by Brandon Haley, initiated the biggest position in Southwest Airlines Co. (NYSE:LUV). Holocene Advisors had $133.2 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $38.8 million position during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Sander Gerber’s Hudson Bay Capital Management, and Israel Englander’s Millennium Management.
Let’s go over hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). These stocks are Electronic Arts Inc. (NASDAQ:EA), Amphenol Corporation (NYSE:APH), Nutrien Ltd. (NYSE:NTR), and Alcon Inc. (NYSE:ALC). This group of stocks’ market valuations match LUV’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EA | 64 | 2089888 | 5 |
| APH | 31 | 758511 | 6 |
| NTR | 25 | 174521 | 3 |
| ALC | 22 | 482231 | 4 |
| Average | 35.5 | 876288 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $876 million. That figure was $3855 million in LUV’s case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 22 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately LUV wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on LUV were disappointed as the stock returned 20.5% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
