Did Hedge Funds Drop The Ball On Murphy USA Inc. (MUSA) ?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Murphy USA Inc. (NYSE:MUSA).

Hedge fund interest in Murphy USA Inc. (NYSE:MUSA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare MUSA to other stocks including AMC Networks Inc (NASDAQ:AMCX), American Eagle Outfitters Inc. (NYSE:AEO), and Vonage Holdings Corp. (NYSE:VG) to get a better sense of its popularity.

Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the fresh hedge fund action surrounding Murphy USA Inc. (NYSE:MUSA).

Hedge fund activity in Murphy USA Inc. (NYSE:MUSA)

At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MUSA over the last 17 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in Murphy USA Inc. (NYSE:MUSA), which was worth $69.1 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $58.5 million worth of shares. Renaissance Technologies, GLG Partners, and Millennium Management 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 Arrowstreet Capital allocated the biggest weight to Murphy USA Inc. (NYSE:MUSA), around 0.14% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, dishing out 0.1 percent of its 13F equity portfolio to MUSA.

Because Murphy USA Inc. (NYSE:MUSA) has experienced declining sentiment from hedge fund managers, we can see that there is a sect of hedge funds that elected to cut their entire stakes by the end of the third quarter. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace dropped the largest stake of the 750 funds watched by Insider Monkey, worth close to $6.4 million in stock. Charles Davidson and Joseph Jacobs’s fund, Wexford Capital, also said goodbye to its stock, about $4.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Murphy USA Inc. (NYSE:MUSA). We will take a look at AMC Networks Inc (NASDAQ:AMCX), American Eagle Outfitters Inc. (NYSE:AEO), Vonage Holdings Corp. (NYSE:VG), and Main Street Capital Corporation (NYSE:MAIN). This group of stocks’ market values resemble MUSA’s market value.

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As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $254 million. That figure was $224 million in MUSA’s case. Vonage Holdings Corp. (NYSE:VG) is the most popular stock in this table. On the other hand Main Street Capital Corporation (NYSE:MAIN) is the least popular one with only 4 bullish hedge fund positions. Murphy USA Inc. (NYSE:MUSA) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on MUSA as the stock returned 37.8% during the first two months of Q4 and outperformed the market by an even larger margin.

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