Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of Norfolk Southern Corp. (NYSE:NSC) based on that data.
Norfolk Southern Corp. (NYSE:NSC) investors should be aware of a decrease in enthusiasm from smart money lately. Our calculations also showed that NSC 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).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ken Griffin of Citadel Investment Group
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. Now let’s take a look at the recent hedge fund action encompassing Norfolk Southern Corp. (NYSE:NSC).
How have hedgies been trading Norfolk Southern Corp. (NYSE:NSC)?
Heading into the fourth quarter of 2019, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in NSC over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
More specifically, Soroban Capital Partners was the largest shareholder of Norfolk Southern Corp. (NYSE:NSC), with a stake worth $475.2 million reported as of the end of September. Trailing Soroban Capital Partners was Palestra Capital Management, which amassed a stake valued at $167.4 million. Citadel Investment Group, Balyasny Asset Management, and Arrowstreet Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Norfolk Southern Corp. (NYSE:NSC), around 7.25% of its 13F portfolio. Soroban Capital Partners is also relatively very bullish on the stock, designating 6.69 percent of its 13F equity portfolio to NSC.
Due to the fact that Norfolk Southern Corp. (NYSE:NSC) has faced declining sentiment from hedge fund managers, logic holds that there were a few hedgies that decided to sell off their entire stakes heading into Q4. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management said goodbye to the biggest stake of the 750 funds followed by Insider Monkey, worth close to $69.2 million in stock. Aaron Cowen’s fund, Suvretta Capital Management, also said goodbye to its stock, about $42.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 8 funds heading into Q4.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Norfolk Southern Corp. (NYSE:NSC) but similarly valued. We will take a look at Prudential Public Limited Company (NYSE:PUK), Micron Technology, Inc. (NASDAQ:MU), Schlumberger Limited. (NYSE:SLB), and Bank of Montreal (NYSE:BMO). This group of stocks’ market valuations resemble NSC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PUK | 11 | 58421 | 6 |
| MU | 67 | 3620548 | 5 |
| SLB | 49 | 1246666 | 8 |
| BMO | 14 | 393078 | 1 |
| Average | 35.25 | 1329678 | 5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $1330 million. That figure was $1947 million in NSC’s case. Micron Technology, Inc. (NASDAQ:MU) is the most popular stock in this table. On the other hand Prudential Public Limited Company (NYSE:PUK) is the least popular one with only 11 bullish hedge fund positions. Norfolk Southern Corp. (NYSE:NSC) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on NSC, though not to the same extent, as the stock returned 32.5% during 2019 (as of 12/23) and outperformed the market as well.
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.
