Here is What Hedge Funds Think About XP Inc. (XP)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding XP Inc. (NASDAQ:XP) and determine whether hedge funds had an edge regarding this stock.

XP Inc. (NASDAQ:XP) investors should be aware of an increase in hedge fund interest recently. XP Inc. (NASDAQ:XP) was in 21 hedge funds’ portfolios at the end of June. The all time high for this statistics is 28. There were 13 hedge funds in our database with XP positions at the end of the first quarter. Our calculations also showed that XP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Lee Ainslie of Maverick Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s review the latest hedge fund action regarding XP Inc. (NASDAQ:XP).

Hedge fund activity in XP Inc. (NASDAQ:XP)

Heading into the third quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 62% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards XP over the last 20 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

More specifically, Alkeon Capital Management was the largest shareholder of XP Inc. (NASDAQ:XP), with a stake worth $169.7 million reported as of the end of September. Trailing Alkeon Capital Management was Maverick Capital, which amassed a stake valued at $59.5 million. Adage Capital Management, Samlyn Capital, 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 ThornTree Capital Partners allocated the biggest weight to XP Inc. (NASDAQ:XP), around 2.06% of its 13F portfolio. Maverick Capital is also relatively very bullish on the stock, designating 1.25 percent of its 13F equity portfolio to XP.

As industrywide interest jumped, key money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in XP Inc. (NASDAQ:XP). Arrowstreet Capital had $33.3 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $12 million position during the quarter. The following funds were also among the new XP investors: Steve Cohen’s Point72 Asset Management, David Paradice’s Paradice Investment Management, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as XP Inc. (NASDAQ:XP) but similarly valued. We will take a look at The Williams Companies, Inc. (NYSE:WMB), Ecopetrol S.A. (NYSE:EC), Fortive Corporation (NYSE:FTV), China Telecom Corporation Limited (NYSE:CHA), Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), Ball Corporation (NYSE:BLL), and Kellogg Company (NYSE:K). This group of stocks’ market caps match XP’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.9 hedge funds with bullish positions and the average amount invested in these stocks was $476 million. That figure was $431 million in XP’s case. The Williams Companies, Inc. (NYSE:WMB) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. XP Inc. (NASDAQ:XP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for XP is 54.7. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately XP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); XP investors were disappointed as the stock returned -0.8% in the third 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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