Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like MPLX LP (NYSE:MPLX).
MPLX LP (NYSE:MPLX) has seen an increase in hedge fund interest lately. MPLX was in 13 hedge funds’ portfolios at the end of September. There were 11 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 Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
James Dondero of Highland Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to check out the latest hedge fund action surrounding MPLX LP (NYSE:MPLX).
What have hedge funds been doing with MPLX LP (NYSE:MPLX)?
Heading into the fourth quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MPLX over the last 17 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Stockbridge Partners held the most valuable stake in MPLX LP (NYSE:MPLX), which was worth $287.5 million at the end of the third quarter. On the second spot was Zimmer Partners which amassed $116.5 million worth of shares. Marshall Wace, Highland Capital Management, and Magnetar Capital 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 Stockbridge Partners allocated the biggest weight to MPLX LP (NYSE:MPLX), around 11.41% of its 13F portfolio. BP Capital is also relatively very bullish on the stock, designating 6.2 percent of its 13F equity portfolio to MPLX.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the most outsized position in MPLX LP (NYSE:MPLX). Marshall Wace had $22.2 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser’s Magnetar Capital also made a $11.9 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, Matthew Hulsizer’s PEAK6 Capital Management, and David Andre and Astro Teller’s Cerebellum Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as MPLX LP (NYSE:MPLX) but similarly valued. We will take a look at Brown-Forman Corporation (NYSE:BF), IQVIA Holdings, Inc. (NYSE:IQV), The Williams Companies, Inc. (NYSE:WMB), and Southwest Airlines Co. (NYSE:LUV). This group of 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 |
|---|---|---|---|
| BF | 21 | 632843 | -7 |
| IQV | 64 | 4469195 | -3 |
| WMB | 36 | 643068 | 2 |
| LUV | 36 | 3854849 | 3 |
| Average | 39.25 | 2399989 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 39.25 hedge funds with bullish positions and the average amount invested in these stocks was $2400 million. That figure was $487 million in MPLX’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Brown-Forman Corporation (NYSE:BF) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks MPLX LP (NYSE:MPLX) is even less popular than BF. Hedge funds dodged a bullet by taking a bearish stance towards MPLX. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MPLX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MPLX investors were disappointed as the stock returned -13.3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
