Should You Buy Phillips 66 Partners LP (PSXP)?

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 Phillips 66 Partners LP (NYSE:PSXP).

Hedge fund interest in Phillips 66 Partners LP (NYSE:PSXP) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Imperial Oil Limited (NYSE:IMO), Magellan Midstream Partners, L.P. (NYSE:MMP), and Franklin Resources, Inc. (NYSE:BEN) to gather more data points. Our calculations also showed that PSXP 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.

Stuart Zimmer of Zimmer Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Now let’s go over the key hedge fund action encompassing Phillips 66 Partners LP (NYSE:PSXP).

How are hedge funds trading Phillips 66 Partners LP (NYSE:PSXP)?

At the end of the first quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PSXP over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Zimmer Partners held the most valuable stake in Phillips 66 Partners LP (NYSE:PSXP), which was worth $8.4 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $3 million worth of shares. PEAK6 Capital Management, Heronetta Management, and Prescott Group Capital 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 Phillips 66 Partners LP (NYSE:PSXP), around 1.97% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, setting aside 0.4 percent of its 13F equity portfolio to PSXP.

Because Phillips 66 Partners LP (NYSE:PSXP) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedgies that slashed their entire stakes in the first quarter. Interestingly, T Boone Pickens’s BP Capital dropped the largest investment of the 750 funds tracked by Insider Monkey, comprising about $4.9 million in stock. Richard Driehaus’s fund, Driehaus Capital, also dropped its stock, about $1.7 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Phillips 66 Partners LP (NYSE:PSXP) but similarly valued. We will take a look at Imperial Oil Limited (NYSE:IMO), Magellan Midstream Partners, L.P. (NYSE:MMP), Franklin Resources, Inc. (NYSE:BEN), and WPP Plc (NYSE:WPP). This group of stocks’ market valuations are similar to PSXP’s market valuation.

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 $113 million. That figure was $14 million in PSXP’s case. Franklin Resources, Inc. (NYSE:BEN) is the most popular stock in this table. On the other hand WPP Plc (NYSE:WPP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Phillips 66 Partners LP (NYSE:PSXP) is even less popular than WPP. Hedge funds clearly dropped the ball on PSXP 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 PSXP as the stock returned 25% 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.