Were Hedge Funds Right About Dumping Delta Air Lines, Inc. (DAL)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Delta Air Lines, Inc. (NYSE:DAL) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Delta Air Lines, Inc. (NYSE:DAL) going to take off soon? Money managers were turning less bullish. The number of bullish hedge fund positions shrunk by 17 in recent months. Our calculations also showed that DAL 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s analyze the latest hedge fund action regarding Delta Air Lines, Inc. (NYSE:DAL).

How are hedge funds trading Delta Air Lines, Inc. (NYSE:DAL)?

Heading into the second quarter of 2020, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DAL 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.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the largest position in Delta Air Lines, Inc. (NYSE:DAL), worth close to $2.0509 billion, comprising 1.2% of its total 13F portfolio. Coming in second is Lansdowne Partners, managed by Alex Snow, which holds a $293.5 million position; the fund has 16.3% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish contain Paul Reeder and Edward Shapiro’s PAR Capital Management, Cliff Asness’s AQR Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Lansdowne Partners allocated the biggest weight to Delta Air Lines, Inc. (NYSE:DAL), around 16.26% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, designating 4.89 percent of its 13F equity portfolio to DAL.

Because Delta Air Lines, Inc. (NYSE:DAL) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there exists a select few money managers who sold off their positions entirely heading into Q4. Intriguingly, Stephen C. Freidheim’s Cyrus Capital Partners dumped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling close to $149.7 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dropped its stock, about $145.9 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 17 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Delta Air Lines, Inc. (NYSE:DAL). These stocks are AmerisourceBergen Corporation (NYSE:ABC), Chipotle Mexican Grill, Inc. (NYSE:CMG), Cintas Corporation (NASDAQ:CTAS), and China Unicom (Hong Kong) Limited (NYSE:CHU). All of these stocks’ market caps are closest to DAL’s market cap.

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As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $954 million. That figure was $2970 million in DAL’s case. Chipotle Mexican Grill, Inc. (NYSE:CMG) is the most popular stock in this table. On the other hand China Unicom (Hong Kong) Limited (NYSE:CHU) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Delta Air Lines, Inc. (NYSE:DAL) is more popular among hedge funds. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately DAL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DAL were disappointed as the stock returned -1.7% during the second quarter 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.