Norfolk Southern Corp. (NSC): Hedge Funds Taking Some Chips Off The Table

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Norfolk Southern Corp. (NYSE:NSC) and determine whether hedge funds skillfully traded this stock.

Norfolk Southern Corp. (NYSE:NSC) was in 47 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 54. NSC shareholders have witnessed a decrease in hedge fund interest recently. There were 51 hedge funds in our database with NSC holdings at the end of March. Our calculations also showed that NSC 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.

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 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Keith Meister of Corvex Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to take a look at the key hedge fund action encompassing Norfolk Southern Corp. (NYSE:NSC).

What does smart money think about Norfolk Southern Corp. (NYSE:NSC)?

At second quarter’s end, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NSC over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

The largest stake in Norfolk Southern Corp. (NYSE:NSC) was held by Citadel Investment Group, which reported holding $139.6 million worth of stock at the end of September. It was followed by Adage Capital Management with a $101.5 million position. Other investors bullish on the company included Fisher Asset Management, Corvex Capital, and Suvretta Capital Management. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Norfolk Southern Corp. (NYSE:NSC), around 7.84% of its 13F portfolio. Corvex Capital is also relatively very bullish on the stock, earmarking 5.34 percent of its 13F equity portfolio to NSC.

Seeing as Norfolk Southern Corp. (NYSE:NSC) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of fund managers that decided to sell off their full holdings heading into Q3. Interestingly, Andreas Halvorsen’s Viking Global said goodbye to the largest investment of all the hedgies watched by Insider Monkey, valued at an estimated $258.1 million in stock, and Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners was right behind this move, as the fund sold off about $160.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Norfolk Southern Corp. (NYSE:NSC) but similarly valued. These stocks are Waste Management, Inc. (NYSE:WM), The PNC Financial Services Group Inc. (NYSE:PNC), Aon plc (NYSE:AON), Atlassian Corporation Plc (NASDAQ:TEAM), Honda Motor Co Ltd (NYSE:HMC), Workday Inc (NASDAQ:WDAY), and Edwards Lifesciences Corporation (NYSE:EW). This group of stocks’ market values resemble NSC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 47.3 hedge funds with bullish positions and the average amount invested in these stocks was $2388 million. That figure was $867 million in NSC’s case. Workday Inc (NASDAQ:WDAY) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 10 bullish hedge fund positions. Norfolk Southern Corp. (NYSE:NSC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NSC is 56.5. 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. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on NSC as the stock returned 21.6% since the end of June and outperformed the market by an even larger margin.

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