Hedge Funds Are Dumping Southwest Airlines Co. (LUV)

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 Southwest Airlines Co. (NYSE:LUV).

Southwest Airlines Co. (NYSE:LUV) investors should pay attention to a decrease in hedge fund sentiment of late. Southwest Airlines Co. (NYSE:LUV) was in 39 hedge funds’ portfolios at the end of September. The all time high for this statistic is 58. There were 49 hedge funds in our database with LUV holdings at the end of June. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s go over the latest hedge fund action surrounding Southwest Airlines Co. (NYSE:LUV).

Paul Reeder of PAR Capital Management

Do Hedge Funds Think LUV Is A Good Stock To Buy Now?

At Q3’s end, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the second quarter of 2021. Below, you can check out the change in hedge fund sentiment towards LUV over the last 25 quarters. So, let’s check out 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, Citadel Investment Group, managed by Ken Griffin, holds the largest position in Southwest Airlines Co. (NYSE:LUV). Citadel Investment Group has a $152.5 million call position in the stock, comprising less than 0.1%% of its 13F portfolio. Coming in second is Renaissance Technologies, which holds a $103.9 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money with similar optimism encompass Paul Reeder and Edward Shapiro’s PAR Capital Management, Phill Gross and Robert Atchinson’s Adage Capital Management and Martin Taylor’s Crake Asset Management. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 5.02% of its 13F portfolio. Falcon Edge Capital is also relatively very bullish on the stock, earmarking 3.86 percent of its 13F equity portfolio to LUV.

Judging by the fact that Southwest Airlines Co. (NYSE:LUV) has faced falling interest from the aggregate hedge fund industry, logic holds that there exists a select few hedge funds who sold off their full holdings last quarter. Interestingly, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners dropped the largest investment of the 750 funds watched by Insider Monkey, comprising an estimated $68.1 million in stock, and Gregg Moskowitz’s Interval Partners was right behind this move, as the fund cut about $28.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 10 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Southwest Airlines Co. (NYSE:LUV) but similarly valued. These stocks are XPeng Inc. (NYSE:XPEV), Equity Residential (NYSE:EQR), Keysight Technologies Inc (NYSE:KEYS), Sun Life Financial Inc. (NYSE:SLF), D.R. Horton, Inc. (NYSE:DHI), The Kroger Co. (NYSE:KR), and Ameriprise Financial, Inc. (NYSE:AMP). This group of stocks’ market valuations match LUV’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.1 hedge funds with bullish positions and the average amount invested in these stocks was $1341 million. That figure was $730 million in LUV’s case. D.R. Horton, Inc. (NYSE:DHI) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 8 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. Our overall hedge fund sentiment score for LUV is 51.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.6% in 2021 through November 30th and beat the market again by 5.6 percentage points. Unfortunately LUV wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -13.7% since the end of September (through 11/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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