Was The Smart Money Right About Phillips 66 (PSX)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Phillips 66 (NYSE:PSX).

Phillips 66 (NYSE:PSX) has experienced a decrease in enthusiasm from smart money of late. Phillips 66 (NYSE:PSX) was in 42 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 47. There were 43 hedge funds in our database with PSX holdings at the end of March. Our calculations also showed that PSX 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.

Phillip Gross of Adage Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. With all of this in mind we’re going to check out the new hedge fund action surrounding Phillips 66 (NYSE:PSX).

What does smart money think about Phillips 66 (NYSE:PSX)?

At Q2’s end, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PSX over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Millennium Management was the largest shareholder of Phillips 66 (NYSE:PSX), with a stake worth $87.7 million reported as of the end of September. Trailing Millennium Management was East Side Capital (RR Partners), which amassed a stake valued at $48 million. Masters Capital Management, Citadel Investment Group, and Adage 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 East Side Capital (RR Partners) allocated the biggest weight to Phillips 66 (NYSE:PSX), around 8.22% of its 13F portfolio. Masters Capital Management is also relatively very bullish on the stock, dishing out 4.06 percent of its 13F equity portfolio to PSX.

Since Phillips 66 (NYSE:PSX) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of hedge funds who sold off their positions entirely last quarter. At the top of the heap, Todd J. Kantor’s Encompass Capital Advisors dropped the largest position of the 750 funds followed by Insider Monkey, comprising about $36.2 million in stock. Jonathan Barrett and Paul Segal’s fund, Luminus Management, also dumped its stock, about $18 million worth. These moves 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 – not necessarily in the same industry as Phillips 66 (NYSE:PSX) but similarly valued. These stocks are Mizuho Financial Group Inc. (NYSE:MFG), O’Reilly Automotive Inc (NASDAQ:ORLY), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), Southern Copper Corporation (NYSE:SCCO), Twilio Inc. (NYSE:TWLO), Cognizant Technology Solutions Corp (NASDAQ:CTSH), and Chunghwa Telecom Co., Ltd (NYSE:CHT). All of these stocks’ market caps resemble PSX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.4 hedge funds with bullish positions and the average amount invested in these stocks was $1435 million. That figure was $363 million in PSX’s case. Twilio Inc. (NYSE:TWLO) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 4 bullish hedge fund positions. Phillips 66 (NYSE:PSX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PSX is 61.5. 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. This is a slightly positive signal but 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 beat the market by 21 percentage points. Unfortunately PSX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PSX were disappointed as the stock returned -28.8% 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 many of these stocks already outperformed the market so far this year.

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