Was The Smart Money Right About Dumping ConocoPhillips (COP)?

In this article you are going to find out whether hedge funds think ConocoPhillips (NYSE:COP) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

ConocoPhillips (NYSE:COP) has experienced a decrease in activity from the world’s largest hedge funds recently. ConocoPhillips (NYSE:COP) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 70. There were 54 hedge funds in our database with COP holdings at the end of March. Our calculations also showed that COP 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.

Joe Huber of Huber Capital Management

Now we’re going to go over the key hedge fund action encompassing ConocoPhillips (NYSE:COP).

What does smart money think about ConocoPhillips (NYSE:COP)?

At Q2’s end, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 57 hedge funds with a bullish position in COP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, D E Shaw held the most valuable stake in ConocoPhillips (NYSE:COP), which was worth $227.9 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $201.8 million worth of shares. Arrowstreet Capital, Yacktman Asset Management, and GLG Partners 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 Elm Ridge Capital allocated the biggest weight to ConocoPhillips (NYSE:COP), around 7.17% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, dishing out 3.5 percent of its 13F equity portfolio to COP.

Because ConocoPhillips (NYSE:COP) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of funds that elected to cut their entire stakes last quarter. It’s worth mentioning that Steve Cohen’s Point72 Asset Management dumped the biggest position of the 750 funds monitored by Insider Monkey, totaling about $56.8 million in stock. Brandon Haley’s fund, Holocene Advisors, also dropped its stock, about $31 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 10 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as ConocoPhillips (NYSE:COP) but similarly valued. We will take a look at Norfolk Southern Corp. (NYSE:NSC), 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), and Workday Inc (NASDAQ:WDAY). All of these stocks’ market caps are similar to COP’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 47.6 hedge funds with bullish positions and the average amount invested in these stocks was $2313 million. That figure was $913 million in COP’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. ConocoPhillips (NYSE:COP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for COP is 40.8. 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 30% in 2020 through October 23rd and surpassed the market by 21 percentage points. Unfortunately COP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); COP investors were disappointed as the stock returned -20.8% since the end of June (through 10/23) 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.