Hedge Funds’ Favorite Industrial Stocks Going Into 2016

The fourth quarter of last year came as a respite for most equity investors who saw the value of their holdings plummet quite significantly amid a rout in the overall market during the third quarter. Among the sectors which bounced back with great zeal and in that process surpassed even the S&P 500 during the October-December period was Industrials. While the S&P 500 ended fourth quarter up by 6.45%, the S&P 500 Industrials returned 7.35% during the same period. Industrials also enjoy the distinction of being one of the most popular sectors among value-focused investors. Since high-flying biotech or tech stocks trade always at a premium relative to their industrial counterparts, investors who prefer stable earnings and growth over the long-term generally avoid them. However, in spite of the advantages the sector offers, due to a large number of companies that come under the umbrella of industrials, investors usually find it very hard to select the right industrials stocks for their portfolios.

To make their stock selection easier, we at Insider Monkey routinely come up with the list of most popular stocks industrial stocks among hedge funds. This time, the top five industrial stocks that made it to our list for the fourth quarter had the backing of at least 46 prominent investors among the 800+ we cover and a minimum aggregate value of investors’ holding in them of $1.89 billion. We would also like to point out that the most popular industrial stocks among hedge funds at the end of fourth quarter was Precision Castparts Corp. (PCP). However, since it got delisted recently after getting acquired by Berkshire Hathaway and an investor can no longer buy its shares, we have decided to omit it from our list.

Historically the most popular stocks among hedge funds outperform the market by a decent margin. The magnitude of outperformance is actually inversely related

#5 Sealed Air Corp (NYSE:SEE)

– Investors with Long Positions (as of December 31): 46

– Aggregate Value of Investors’ Holdings (as of December 31): $1.9 Billion

The ownership of Sealed Air Corp (NYSE:SEE) among hedge funds covered by us declined by three and the aggregate value of investors’ holding in it also suffered a decline of $293 million during the fourth quarter. However, in aggregate, these investors still owned 21.60% of all outstanding shares of the company. Due to the rally Sealed Air Corp (NYSE:SEE)’s stock has seen in the last few days after the company reported its fourth quarter results, it is currently trading up 4% year-to-date. While the Street had estimated the company to report EPS of $0.50 on revenue of $1.78 billion for the quarter, Sealed Air Corp declared EPS of $0.76 on revenue of $1.75 billion. On February 19, analysts at Bank of America upgraded the stock to a ‘Buy’ from ‘Neutral’ while keeping their price target on it unchanged at $52. Jeff Lignelli‘s Incline Global Management was one of the hedge funds that initiated a stake in the company during the fourth quarter; it held 502,380 shares of Sealed Air Corp, as of December 31.

#4 Dow Chemical Co (NYSE:DOW)

– Investors with Long Positions (as of December 31): 49

– Aggregate Value of Investors’ Holdings (as of December 31): $4.47 Billion

Though its stock rose by over 18% during the fourth quarter, Dow Chemical Co (NYSE:DOW)’s saw its popularity decline among hedge funds during the same period. The hedge funds covered by us that were long in the stock declined by seven and the aggregate value of their holdings decreased by over $1.11 billion during the last quarter of 2015. In December, Dow Chemical Co (NYSE:DOW) announced that it will merge with E I Du Pont De Nemours And Co (NYSE:DD). Along with merger announcement, both the companies also made it clear that a few years after the merger gets completed they plan to split the combined entity into three different businesses. The better than expected fourth quarter numbers declared by Dow Chemical Co has helped its stock to recoup some of the loss it suffered earlier in the year, however, it still trades down 2.78% year-to-date. Dow Chemical Co currently pays a quarterly dividend of $0.46 per share, which translates into an attractive annual dividend yield of 3.7%. Billionaire Dan Loeb‘s Third Point increased its stake in the company by 8% to 25.25 million shares during the fourth quarter.

#3 Procter & Gamble Co (NYSE:PG)

– Investors with Long Positions (as of December 31): 52

– Aggregate Value of Investors’ Holdings (as of December 31): $9 Billion

Moving on, hedge funds covered by us that were long in Procter & Gamble Co (NYSE:PG) declined by six during the fourth quarter. However, the aggregate value of their holdings in the company saw only a marginal decline during the same period. Shares of Procter & Gamble Co (NYSE:PG) have been on a gradual rise since September last year, registering gains of 10.4% during the fourth quarter and currently trading up 2.27% year-to-date. Despite this rise, Procter & Gamble Co currently sports an attractive annual dividend yield of 3.27%. Some analysts who cover the stock feel that the stock has overstretched itself in the last few months and it would be hard for it to continue its bull run going forward. According to them, the stock currently trading at trailing P/E of 26.84 is overvalued and the company faces major currency and transportation cost headwinds, which will impact its financial performance. Donald Yacktman’s Yacktman Asset Management reduced its stake in Procter & Gamble Co by 22% to 21.59 million during the October-December period.

#2 LyondellBasell Industries NV (NYSE:LYB)

– Investors with Long Positions (as of December 31): 55

– Aggregate Value of Investors’ Holdings (as of December 31): $3.17 Billion

LyondellBasell Industries NV (NYSE:LYB) saw a slight decrease in its popularity during the fourth quarter, as the number of investors that were long in it declined by two and the aggregate value of their holdings in it dropped by $663 million during that time. Investors who reduced their stake in the company fourth quarter included billionaire Andreas Halvorsen‘ Viking Global, which brought its holding down by 22% to nearly 9.33 million shares. After trading below their 50-Day moving average for three months, shares of LyondellBasell Industries NV (NYSE:LYB) have recently breached it from the upside and along with it also broken their critical resistance near the $80 mark, which technical analysts see as a very positive sign for the stock in the short-term. Since the stock is currently trading at a very low forward P/E of 8.41, even fundamental analysts believe that it is poised to move higher in the near future. The 24 prominent analysts who cover LyondellBasell Industries NV’s stock currently have an average rating of ‘Overweight’ on it with an average price target of $90.90.

#1 Air Products & Chemicals, Inc. (NYSE:APD)

– Investors with Long Positions (as of December 31): 55

– Aggregate Value of Investors’ Holdings (as of December 31): $6.75 Billion

Despite witnessing the largest drop in popularity among the stocks in this list, Air Products & Chemicals, Inc. (NYSE:APD) was the favorite industrial stocks among hedge funds during the fourth quarter. Shares of the company  saw a consistent decline in the period between February last year and January this year. However, they have recently started moving up and currently trade up 2.2% year-to-date. During the fourth quarter, hedge funds covered by us that were long the stock declined by 22 and the aggregate values of their holdings in it slid by over $1 billion. Air Products & Chemicals, Inc. (NYSE:APD) is currently in the process of spinning off its lower-margin materials technologies business into a separately trading public entity ‘ Versum Materials’; it expects this spin-off to get completed by September this year. Analysts think that post this spin off the company will be able to focus on its high-margin core business of industrial gases, which will help it in increasing shareholders returns. In addition, they also feel that the routine multi-million dollar purchases of Air Products & Chemicals, Inc.’s stock by the company’s CEO between 2013 and 2016 has helped in boosting investors’ confidence in the company. Billionaire Bill Ackman‘s Pershing Square continued to own 20.55 million shares of the company, at the end of December.

Disclosure: None