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

With the second-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the third quarter of 2021. One of these stocks was Southwest Airlines Co. (NYSE:LUV).

Southwest Airlines Co. (NYSE:LUV) was in 49 hedge funds’ portfolios at the end of June. The all time high for this statistic is 58. LUV shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 52 hedge funds in our database with LUV positions at the end of the first quarter. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Gerson of Falcon Edge Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, billionaire John Paulson is loading up on the miners, so we are checking out stock pitches like this mining stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let’s review the new hedge fund action regarding Southwest Airlines Co. (NYSE:LUV).

Do Hedge Funds Think LUV Is A Good Stock To Buy Now?

At the end of June, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LUV over the last 24 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Southwest Airlines Co. (NYSE:LUV), with a stake worth $118.9 million reported as of the end of June. Trailing Renaissance Technologies was PAR Capital Management, which amassed a stake valued at $112.4 million. Citadel Investment Group, Millennium Management, and LMR 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 Lodge Hill Capital allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 7.16% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, dishing out 2.75 percent of its 13F equity portfolio to LUV.

Because Southwest Airlines Co. (NYSE:LUV) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of funds who were dropping their full holdings last quarter. Interestingly, D. E. Shaw’s D E Shaw cut the largest investment of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $45.6 million in stock, and Bart Baum’s Ionic Capital Management was right behind this move, as the fund dumped about $30.7 million worth. These transactions are interesting, as total hedge fund interest fell by 3 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Southwest Airlines Co. (NYSE:LUV) but similarly valued. These stocks are Carnival Corporation & plc  (NYSE:CCL), Waste Connections, Inc. (NYSE:WCN), Copart, Inc. (NASDAQ:CPRT), Lennar Corporation (NYSE:LEN), Ferguson plc (NYSE:FERG), PACCAR Inc (NASDAQ:PCAR), and AMETEK, Inc. (NYSE:AME). This group of 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 33.4 hedge funds with bullish positions and the average amount invested in these stocks was $1800 million. That figure was $926 million in LUV’s case. Lennar Corporation (NYSE:LEN) is the most popular stock in this table. On the other hand Ferguson plc (NYSE:FERG) is the least popular one with only 11 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LUV is 76.1. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately LUV wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -1.6% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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