Is Imperial Oil Limited (USA) (IMO) A Good Stock To Buy?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Is Imperial Oil Limited (USA) (NYSE:IMO) undervalued? Hedge funds don’t seem to think so, as they are reducing their bets on the stock. The number of bullish hedge fund bets was slashed by 3 recently. IMO was in 6 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with IMO positions at the end of June. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Sprint Nextel Corporation (NYSE:S), Humana Inc (NYSE:HUM), and Zimmer Biomet Holdings Inc (NYSE:ZBH) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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How have hedgies been trading Imperial Oil Limited (USA) (NYSE:IMO)?

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a 33% fall from the second quarter of 2016. By comparison, 8 hedge funds held shares or bullish call options in IMO heading into this year, which peaked at 11 at the end of Q1. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Cliff Asness’ AQR Capital Management has the largest position in Imperial Oil Limited (USA) (NYSE:IMO), worth close to $24.2 million. The second largest stake is held by D E Shaw, one of the biggest hedge funds in the world, which has an $18.2 million position. Remaining members of the smart money that hold long positions include Ray Dalio’s Bridgewater Associates, Ken Griffin’s Citadel Investment Group, and Jim Simons’ Renaissance Technologies. We should note that Bridgewater Associates is among our list of the 100 best performing hedge funds, which is based on the performance of their 13F long positions in non-micro-cap stocks.

Judging by the fact that Imperial Oil Limited (USA) (NYSE:IMO) has witnessed declining sentiment from hedge fund managers, logic holds that there was a specific group of hedge funds that elected to cut their positions entirely heading into Q4. At the top of the heap, First Eagle Investment Management sold off the largest position of all the hedgies watched by Insider Monkey, worth an estimated $116.3 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also said goodbye to its stock, about $0.6 million worth.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Imperial Oil Limited (USA) (NYSE:IMO) but similarly valued. We will take a look at Sprint Nextel Corporation (NYSE:S), Humana Inc (NYSE:HUM), Zimmer Biomet Holdings Inc (NYSE:ZBH), and Baxter International Inc. (NYSE:BAX). This group of stocks’ market caps are closest to IMO’s market cap.

As you can see these stocks had an average of 47 hedge funds with bullish positions and the average amount invested in these stocks was $3.04 billion. That figure was just $76 million in IMO’s case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand Sprint Nextel Corporation (NYSE:S) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Imperial Oil Limited (USA) (NYSE:IMO) is even less popular than S. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock.

Disclosure: None