Are Investors Right to Be Bearish On Magellan Midstream Partners, L.P. (MMP)?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Magellan Midstream Partners, L.P. (NYSE:MMP) was in 15 hedge funds’ portfolios at the end of the third quarter of 2015. MMP shareholders have witnessed an increase in support from the world’s most elite money managers of late. There were 12 hedge funds in our database with Magellan Midstream Partners, L.P. (NYSE:MMP) holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as The J.M. Smucker Company (NYSE:SJM), Rockwell Automation (NYSE:ROK), and Seagate Technology PLC (NASDAQ:STX) to gather more data points.

To most shareholders, hedge funds are seen as underperforming, old investment vehicles of yesteryear. While there are more than 8000 funds trading today, we choose to focus on the top tier of this group, approximately 700 funds. It is estimated that this group of investors controls the majority of the hedge fund industry’s total capital, and by keeping an eye on their matchless stock picks, Insider Monkey has figured out several investment strategies that have historically defeated the broader indices. Insider Monkey’s small-cap hedge fund strategy beat the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Now, let’s review the recent action regarding Magellan Midstream Partners, L.P. (NYSE:MMP).

How have hedgies been trading Magellan Midstream Partners, L.P. (NYSE:MMP)?

At the end of September, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, an increase of 25% from the second quarter. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Osterweis Capital Management, managed by John Osterweis, holds the largest position in Magellan Midstream Partners, L.P. (NYSE:MMP). The fund has a $70.4 million position in the stock, comprising 3.2% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, with a $36 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism encompass Bernard Selz’s Selz Capital, and Israel Englander’s Millennium Management.

As one would reasonably expect, key hedge funds were leading the bulls’ herd. Millennium Management initiated the largest position in Magellan Midstream Partners, L.P. (NYSE:MMP). The fund had $13.2 million invested in the company at the end of the quarter. Charles Davidson’s Wexford Capital also made a $7 million investment in the stock during the quarter. The other funds with new positions in the stock are Sander Gerber’s Hudson Bay Capital Management, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Richard Driehaus’ Driehaus Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Magellan Midstream Partners, L.P. (NYSE:MMP) but similarly valued. These stocks are The J.M. Smucker Company (NYSE:SJM), Rockwell Automation (NYSE:ROK), Seagate Technology PLC (NASDAQ:STX), and Molson Coors Brewing Company (NYSE:TAP). This group of stocks’ market valuations resembles Magellan Midstream Partners, L.P. (NYSE:MMP)’s market valuation.

As you can see, these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $1.42 billion. That figure was $187 million in Magellan Midstream Partners, L.P. (NYSE:MMP)’s case. Molson Coors Brewing Company (NYSE:TAP) is the most popular stock in this table. On the other hand, Seagate Technology PLC (NASDAQ:STX) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Magellan Midstream Partners, L.P. (NYSE:MMP) is even less popular than Seagate Technology PLC (NASDAQ:STX). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.