Were Hedge Funds Right About Dumping Valero Energy Corporation (VLO)?

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 (Recession is Imminent: We Need A Travel Ban NOW). 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 Valero Energy Corporation (NYSE:VLO).

Is Valero Energy Corporation (NYSE:VLO) a healthy stock for your portfolio? Prominent investors were taking a bearish view. The number of bullish hedge fund positions were cut by 6 lately. Valero Energy Corporation (NYSE:VLO) was in 39 hedge funds’ portfolios at the end of June. The all time high for this statistics is 56. Our calculations also showed that VLO 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). There were 45 hedge funds in our database with VLO holdings at the end of March.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Crispin Odey of Odey Asset Management Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. Now we’re going to take a gander at the key hedge fund action regarding Valero Energy Corporation (NYSE:VLO).

How have hedgies been trading Valero Energy Corporation (NYSE:VLO)?

At the end of June, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 35 hedge funds with a bullish position in VLO a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

The largest stake in Valero Energy Corporation (NYSE:VLO) was held by Citadel Investment Group, which reported holding $27.2 million worth of stock at the end of June. It was followed by AQR Capital Management with a $22.3 million position. Other investors bullish on the company included Laurion Capital Management, Millennium Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Beech Hill Partners allocated the biggest weight to Valero Energy Corporation (NYSE:VLO), around 1.66% of its 13F portfolio. Swift Run Capital Management is also relatively very bullish on the stock, earmarking 0.67 percent of its 13F equity portfolio to VLO.

Due to the fact that Valero Energy Corporation (NYSE:VLO) has witnessed falling interest from the aggregate hedge fund industry, we can see that there were a few hedge funds that slashed their entire stakes by the end of the second quarter. At the top of the heap, Brandon Haley’s Holocene Advisors dropped the biggest position of all the hedgies monitored by Insider Monkey, worth close to $40.1 million in stock. Crispin Odey’s fund, Odey Asset Management Group, also sold off its stock, about $24 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 6 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Valero Energy Corporation (NYSE:VLO). We will take a look at Xilinx, Inc. (NASDAQ:XLNX), TransDigm Group Incorporated (NYSE:TDG), McCormick & Company, Incorporated (NYSE:MKC), Verisign, Inc. (NASDAQ:VRSN), Moderna, Inc. (NASDAQ:MRNA), Motorola Solutions Inc (NYSE:MSI), and V.F. Corporation (NYSE:VFC). This group of stocks’ market caps are closest to VLO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.1 hedge funds with bullish positions and the average amount invested in these stocks was $2214 million. That figure was $157 million in VLO’s case. TransDigm Group Incorporated (NYSE:TDG) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 27 bullish hedge fund positions. Valero Energy Corporation (NYSE:VLO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VLO is 37. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately VLO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); VLO investors were disappointed as the stock returned -33.2% since the end of June (through 10/30) 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.