Were Hedge Funds Right About Crowding Into Southwest Airlines Co. (LUV)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Southwest Airlines Co. (NYSE:LUV).

Southwest Airlines Co. (NYSE:LUV) has experienced an increase in support from the world’s most elite money managers of late. Southwest Airlines Co. (NYSE:LUV) was in 56 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 58. There were 45 hedge funds in our database with LUV holdings at the end of March. Our calculations also showed that LUV 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.

Crispin Odey of Odey Asset Management Group

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 let’s take a glance at the latest hedge fund action regarding Southwest Airlines Co. (NYSE:LUV).

How have hedgies been trading Southwest Airlines Co. (NYSE:LUV)?

At second quarter’s end, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the previous quarter. By comparison, 33 hedge funds held shares or bullish call options in LUV a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Southwest Airlines Co. (NYSE:LUV) was held by Millennium Management, which reported holding $130.5 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $102.4 million position. Other investors bullish on the company included Lansdowne Partners, PAR Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Odey Asset Management Group allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 5.73% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, dishing out 3.67 percent of its 13F equity portfolio to LUV.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Lansdowne Partners, managed by Suzi Nutton, created the most valuable position in Southwest Airlines Co. (NYSE:LUV). Lansdowne Partners had $87.9 million invested in the company at the end of the quarter. William B. Gray’s Orbis Investment Management also initiated a $47.7 million position during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Crispin Odey’s Odey Asset Management Group, and Principal Global Investors’s Columbus Circle Investors.

Let’s now review hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). We will take a look at Corteva, Inc. (NYSE:CTVA), Old Dominion Freight Line, Inc. (NASDAQ:ODFL), ZoomInfo Technologies Inc. (NASDAQ:ZI), PPL Corporation (NYSE:PPL), Edison International (NYSE:EIX), Wheaton Precious Metals Corp. (NYSE:WPM), and Corning Incorporated (NYSE:GLW). All of these stocks’ market caps match LUV’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $594 million. That figure was $874 million in LUV’s case. Corteva, Inc. (NYSE:CTVA) is the most popular stock in this table. On the other hand Wheaton Precious Metals Corp. (NYSE:WPM) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Southwest Airlines Co. (NYSE:LUV) is more popular among hedge funds. Our overall hedge fund sentiment score for LUV is 89. 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. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on LUV as the stock returned 16.1% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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