Norfolk Southern Corp. (NSC): Are Hedge Funds Right About This Stock?

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 Norfolk Southern Corp. (NYSE:NSC).

Is Norfolk Southern Corp. (NYSE:NSC) going to take off soon? Money managers were taking a bullish view. The number of bullish hedge fund bets went up by 2 in recent months. Norfolk Southern Corp. (NYSE:NSC) was in 46 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 54. Our calculations also showed that NSC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 44 hedge funds in our database with NSC positions at the end of the fourth quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Ken Fisher of Fisher Asset Management

At Insider Monkey we leave no stone unturned when looking for 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, which is why we are checking out this inflation play. We go through lists like 10 best gold stocks to buy to identify promising stocks. 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 homepage. Now we’re going to check out the latest hedge fund action encompassing Norfolk Southern Corp. (NYSE:NSC).

Do Hedge Funds Think NSC Is A Good Stock To Buy Now?

At Q1’s end, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NSC over the last 23 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Ken Fisher’s Fisher Asset Management has the biggest position in Norfolk Southern Corp. (NYSE:NSC), worth close to $165.8 million, corresponding to 0.1% of its total 13F portfolio. The second largest stake is held by Palestra Capital Management, managed by Andrew Immerman and Jeremy Schiffman, which holds a $125.9 million position; 2.6% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that hold long positions comprise Phill Gross and Robert Atchinson’s Adage Capital Management, and Alexander Mitchell’s Scopus Asset Management. In terms of the portfolio weights assigned to each position Alight Capital allocated the biggest weight to Norfolk Southern Corp. (NYSE:NSC), around 3.84% of its 13F portfolio. Palestra Capital Management is also relatively very bullish on the stock, designating 2.64 percent of its 13F equity portfolio to NSC.

As aggregate interest increased, key hedge funds were breaking ground themselves. Palestra Capital Management, managed by Andrew Immerman and Jeremy Schiffman, created the most outsized position in Norfolk Southern Corp. (NYSE:NSC). Palestra Capital Management had $125.9 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $29.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Qing Li’s Sciencast Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Norfolk Southern Corp. (NYSE:NSC) but similarly valued. These stocks are KE Holdings Inc (NYSE:BEKE), Dell Technologies Inc. (NYSE:DELL), Brookfield Asset Management Inc. (NYSE:BAM), Westpac Banking Corporation (NYSE:WBK), Colgate-Palmolive Company (NYSE:CL), The Sherwin-Williams Company (NYSE:SHW), and The Southern Company (NYSE:SO). This group of stocks’ market valuations match NSC’s market valuation.

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As you can see these stocks had an average of 36.9 hedge funds with bullish positions and the average amount invested in these stocks was $1907 million. That figure was $899 million in NSC’s case. Dell Technologies Inc. (NYSE:DELL) is the most popular stock in this table. On the other hand Westpac Banking Corporation (NYSE:WBK) is the least popular one with only 3 bullish hedge fund positions. Norfolk Southern Corp. (NYSE:NSC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NSC is 74.7. 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 positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.4% in 2021 through June 18th and beat the market again by 6.1 percentage points. Unfortunately NSC wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on NSC were disappointed as the stock returned -2.3% since the end of March (through 6/18) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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