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 MPLX LP (NYSE:MPLX) and determine whether hedge funds had an edge regarding this stock.
MPLX LP (NYSE:MPLX) was in 11 hedge funds’ portfolios at the end of the first quarter of 2020. MPLX shareholders have witnessed a decrease in enthusiasm from smart money in recent months. There were 15 hedge funds in our database with MPLX holdings at the end of the previous quarter. Our calculations also showed that MPLX 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 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a glance at the key hedge fund action regarding MPLX LP (NYSE:MPLX).
Hedge fund activity in MPLX LP (NYSE:MPLX)
At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MPLX over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Stockbridge Partners was the largest shareholder of MPLX LP (NYSE:MPLX), with a stake worth $96.7 million reported as of the end of September. Trailing Stockbridge Partners was Zimmer Partners, which amassed a stake valued at $53.5 million. Arrowstreet Capital, Highland Capital Management, and Heronetta Management 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 Heronetta Management allocated the biggest weight to MPLX LP (NYSE:MPLX), around 4.95% of its 13F portfolio. Stockbridge Partners is also relatively very bullish on the stock, earmarking 3.83 percent of its 13F equity portfolio to MPLX.
Seeing as MPLX LP (NYSE:MPLX) has witnessed bearish sentiment from the smart money, logic holds that there was a specific group of hedge funds that decided to sell off their entire stakes by the end of the first quarter. Interestingly, Alec Litowitz and Ross Laser’s Magnetar Capital cut the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $21 million in stock. T Boone Pickens’s fund, BP Capital, also dumped its stock, about $7 million worth. These transactions are important to note, as total hedge fund interest fell by 4 funds by the end of the first quarter.
Let’s now take a look at hedge fund activity in other stocks similar to MPLX LP (NYSE:MPLX). We will take a look at Laboratory Corp. of America Holdings (NYSE:LH), Cincinnati Financial Corporation (NASDAQ:CINF), Kansas City Southern (NYSE:KSU), and International Paper Company (NYSE:IP). All of these stocks’ market caps are closest to MPLX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LH | 45 | 1054505 | -8 |
| CINF | 31 | 484343 | 0 |
| KSU | 45 | 524207 | 5 |
| IP | 29 | 242007 | 4 |
| Average | 37.5 | 576266 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $576 million. That figure was $180 million in MPLX’s case. Laboratory Corp. of America Holdings (NYSE:LH) is the most popular stock in this table. On the other hand International Paper Company (NYSE:IP) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks MPLX LP (NYSE:MPLX) is even less popular than IP. Hedge funds clearly dropped the ball on MPLX 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on MPLX as the stock returned 54.9% in the second quarter and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.
