Is Sunoco LP (SUN) Going to Burn These Hedge Funds?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Sunoco LP (NYSE:SUN).

Sunoco LP (NYSE:SUN) has seen a decrease in hedge fund sentiment in recent months. SUN was in 4 hedge funds’ portfolios at the end of March. There were 6 hedge funds in our database with SUN positions at the end of the previous quarter. Our calculations also showed that SUN isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 44 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.

Richard Driehaus of Driehaus Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to analyze the latest hedge fund action encompassing Sunoco LP (NYSE:SUN).

What does smart money think about Sunoco LP (NYSE:SUN)?

Heading into the second quarter of 2020, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the previous quarter. By comparison, 7 hedge funds held shares or bullish call options in SUN a year ago. So, let’s examine 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, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the most valuable position in Sunoco LP (NYSE:SUN). Arrowstreet Capital has a $3.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Arrowstreet Capital’s heels is Matthew Hulsizer of PEAK6 Capital Management, with a $1.9 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other peers that hold long positions include Richard Driehaus’s Driehaus Capital, and Matthew Hulsizer’s PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Driehaus Capital allocated the biggest weight to Sunoco LP (NYSE:SUN), around 0.05% of its 13F portfolio. PEAK6 Capital Management is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to SUN.

Seeing as Sunoco LP (NYSE:SUN) has faced falling interest from the smart money, logic holds that there is a sect of fund managers that elected to cut their entire stakes by the end of the third quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the biggest stake of the “upper crust” of funds followed by Insider Monkey, totaling close to $5.4 million in stock. Mark Coe’s fund, Intrinsic Edge Capital, also dropped its stock, about $5.2 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Sunoco LP (NYSE:SUN). These stocks are Yelp Inc (NYSE:YELP), Compass Minerals International, Inc. (NYSE:CMP), ICF International Inc (NASDAQ:ICFI), and GCP Applied Technologies Inc. (NYSE:GCP). This group of stocks’ market caps match SUN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $168 million. That figure was $7 million in SUN’s case. Yelp Inc (NYSE:YELP) is the most popular stock in this table. On the other hand ICF International Inc (NASDAQ:ICFI) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Sunoco LP (NYSE:SUN) is even less popular than ICFI. Hedge funds clearly dropped the ball on SUN as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on SUN as the stock returned 70.6% so far in the second quarter and outperformed the market by an even larger margin.

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