Hedge Funds’ Favorite Railroad Stocks For Q4

After outperforming throughout 2013 and 2014, the railroad industry has started declining gradually since the beginning of 2015 and has emerged as one of the worst performing industrial segments this year. While the Dow Jones Industrial Average (INDEXDJX:.DJI) currently trades almost flat for the year, the Dow Jones U.S. Railroads Index (INDEXDJX:DJUSRR) is down more than 30% year-to-date. However, several hedge funds, especially value-focused hedge funds haven’t lost their conviction on the sector and still count among the largest investors of many individual stocks from the sector. Since most railroad stocks are trading significantly cheaper than what they used to trade at the same time last year and many long-term investors are considering going long, we at Insider Monkey thought to make the job of stock selection easier for our readers. To do so, we have come up with a list of railroad stocks that were backed by the largest number of hedge funds at the end of September among the 730 funds we cover.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Norfolk Southern Corp. (NYSE:NSC)

– Hedge Funds with Long Positions (as of September 30): 33

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $495.5 million

Even after being the target of a hostile acquisition bid by Canadian Pacific Railway Limited (USA) (NYSE:CP), shares of Norfolk Southern Corp. (NYSE:NSC) have remained rather resilient and are down by more than 18% year-to-date. On December 14, the company rejected a revised bid from Canadian Pacific Railway Limited (USA) (NYSE:CP), which included a financial incentive to its $30 billion bid for the former to reengage Norfolk Southern Corp. in merger talks. Two more hedge funds among those we cover reported owning a stake in the company at the end of September compared to the previous quarter and the aggregate value of hedge funds’ holdings in the company also saw an increase of $43.3 million during the same time frame. Billionaire Jim Simons‘ Renaissance Technologies increased its stake in the company by 41% to 384,200 shares during the third quarter.

#4 Canadian Pacific Railway Limited (USA) (NYSE:CP)

– Hedge Funds with Long Positions (as of September 30): 39

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $3.97 billion

Shares of Canadian Pacific Railway Limited (USA) (NYSE:CP) have been on a gradual decline since the start of May this year and currently trade down more than 30% year-to-date. This has weighed heavily on the stocks’ popularity among hedge funds. During the third quarter, when the stock slid by over 10%, the number of funds tracked by us that were long in the stock declined by 14 and the aggregate value of investors’ holdings in the company went down by 30%. On December 16 analysts at National Bank Financial reiterated their ‘Outperform’ rating on the stock, but lowered their price target on it to $200 from $214. With ownership of almost 14 million shares of Canadian Pacific Railway Limited, famous activist investor Bill Ackman‘s Pershing Square remained the company’s largest shareholder at the end of September.

#3 Kansas City Southern (NYSE:KSU)

– Hedge Funds with Long Positions (as of September 30): 40

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.45 billion

Kansas City Southern (NYSE:KSU)’s stock has plunged by more than 15% this month alone, extending its year-to-date losses to nearly 38%. The reason for this huge decline this month has been the disappointing revenue forecast the company’s CFO  revealed on December 2. Speaking at Credit Suisse (CS) industrials conference, Kansas City Southern (NYSE:KSU)’s CFO, Michael Upchurch, said that the company anticipates revenue for the fourth quarter of fiscal 2015 to fall at a high-single digit percentage from the same quarter last year. While the stock of the company remained flat during the July – September period, the number of funds with long positions increased by three and the aggregate value of hedge funds’ holdings in the company increased by $46 million. Scott Ferguson‘s Sachem Head Capital initiated a stake in Kansas City Southern during the third quarter by purchasing  over 1.5 million shares of the company.

#2 CSX Corporation (NYSE:CSX)

– Hedge Funds with Long Positions (as of September 30): 47

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.39 billion

After declining rapidly during the period between May and August this year, shares of CSX Corporation (NYSE:CSX) have remained relatively stable and traded entirely in the $25 – $30 range. Although the stock fell by 17% during the third quarter, its popularity among hedge funds remained largely intact during that period. The ownership of the company among funds covered by us declined by one and the aggregate value of hedge funds’ holdings also saw a meager decline of only 1.8% during the third quarter. On December 9, the company announced that it will voluntarily transfer its stock exchange listing from the New York Stock Exchange to NASDAQ. Billionaire James Dinan‘s York Capital Management made an over fivefold increase in its stake in CSX Corporation (NYSE:CSX) to 4.5 million shares during the third quarter.

#1 Union Pacific Corporation (NYSE:UNP)

– Hedge Funds with Long Positions (as of September 30): 55

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.51 billion

Finally, even after suffering a heavy decline in popularity among hedge funds during the July-September, with nine fewer funds reporting positions, Union Pacific Corporation (NYSE:UNP) still emerged as the favorite railroad stock among the funds we track at the end of September. Moreover, the aggregate value of investors’ holdings registered a a decline of 10.2% during the same period. Union Pacific Corporation has lost almost 35% of its market capitalization since the start of the year, but this decline has made its $0.55 per share quarterly dividend translate into an attractive annual dividend yield of 2.82% for a large-cap stock. On December 4, analysts at Bank of America downgraded the stock to ‘Neutral’ from ‘Buy’ and also lowered their price target to $87 from $102. First Eagle Investment Management bought over 1.8 million shares of Union Pacific Corporation during the third quarter and became its largest shareholder among funds tracked by us at the end of September.

Disclosure: None