Hedge Funds Are Buying Shell Midstream Partners LP (SHLX)

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Shell Midstream Partners LP (NYSE:SHLX).

Shell Midstream Partners LP (NYSE:SHLX) investors should be aware of an increase in enthusiasm from smart money lately. Our calculations also showed that SHLX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to 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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.

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 look at the fresh hedge fund action surrounding Shell Midstream Partners LP (NYSE:SHLX).

How are hedge funds trading Shell Midstream Partners LP (NYSE:SHLX)?

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SHLX over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

More specifically, BP Capital was the largest shareholder of Shell Midstream Partners LP (NYSE:SHLX), with a stake worth $4.1 million reported as of the end of September. Trailing BP Capital was Citadel Investment Group, which amassed a stake valued at $3.5 million. Wexford Capital, Lucas Capital 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 BP Capital allocated the biggest weight to Shell Midstream Partners LP (NYSE:SHLX), around 3.31% of its 13F portfolio. Lucas Capital Management is also relatively very bullish on the stock, earmarking 0.93 percent of its 13F equity portfolio to SHLX.

As one would reasonably expect, key money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most outsized position in Shell Midstream Partners LP (NYSE:SHLX). Arrowstreet Capital had $0.7 million invested in the company at the end of the quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Shell Midstream Partners LP (NYSE:SHLX). We will take a look at Philippine Long Distance Telephone (NYSE:PHI), Grand Canyon Education Inc (NASDAQ:LOPE), Micro Focus Intl PLC (NYSE:MFGP), and H&R Block, Inc. (NYSE:HRB). All of these stocks’ market caps are closest to SHLX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $12 million in SHLX’s case. Grand Canyon Education Inc (NASDAQ:LOPE) is the most popular stock in this table. On the other hand Philippine Long Distance Telephone (NYSE:PHI) is the least popular one with only 5 bullish hedge fund positions. Shell Midstream Partners LP (NYSE:SHLX) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SHLX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SHLX investors were disappointed as the stock returned -1.7% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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