UGI Corp (UGI): Hedge Funds Taking Some Chips Off The Table

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 UGI Corp (NYSE:UGI) and determine whether hedge funds had an edge regarding this stock.

UGI Corp (NYSE:UGI) investors should be aware of a decrease in hedge fund sentiment recently. UGI Corp (NYSE:UGI) was in 26 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. Our calculations also showed that UGI 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.

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.

Ric Dillon of Diamond Hill 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. 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. 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 website to get excerpts of these letters in your inbox. Now let’s go over the recent hedge fund action encompassing UGI Corp (NYSE:UGI).

Hedge fund activity in UGI Corp (NYSE:UGI)

At Q2’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in UGI over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

The largest stake in UGI Corp (NYSE:UGI) was held by Diamond Hill Capital, which reported holding $84.7 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $36.7 million position. Other investors bullish on the company included D E Shaw, AQR Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Invenomic Capital Management allocated the biggest weight to UGI Corp (NYSE:UGI), around 2.89% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, setting aside 0.5 percent of its 13F equity portfolio to UGI.

Seeing as UGI Corp (NYSE:UGI) has witnessed bearish sentiment from hedge fund managers, logic holds that there was a specific group of money managers that slashed their positions entirely last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $6.7 million in stock. Jinghua Yan’s fund, TwinBeech Capital, also said goodbye to its stock, about $1 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to UGI Corp (NYSE:UGI). These stocks are Diamondback Energy Inc (NASDAQ:FANG), Carlisle Companies, Inc. (NYSE:CSL), The Boston Beer Company Inc (NYSE:SAM), Lear Corporation (NYSE:LEA), Bausch Health Companies (NYSE:BHC), Kingsoft Cloud Holdings Limited (NASDAQ:KC), and Repligen Corporation (NASDAQ:RGEN). This group of stocks’ market caps match UGI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.7 hedge funds with bullish positions and the average amount invested in these stocks was $663 million. That figure was $220 million in UGI’s case. Lear Corporation (NYSE:LEA) is the most popular stock in this table. On the other hand Kingsoft Cloud Holdings Limited (NASDAQ:KC) is the least popular one with only 20 bullish hedge fund positions. UGI Corp (NYSE:UGI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for UGI is 47.2. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately UGI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); UGI investors were disappointed as the stock returned 3.3% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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