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Did Hedge Funds Make The Right Call On GP Holdings LP (PAGP)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Plains GP Holdings LP (NYSE:PAGP) and determine whether hedge funds had an edge regarding this stock.

Plains GP Holdings LP (NYSE:PAGP) has seen a decrease in hedge fund interest lately. Our calculations also showed that PAGP isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the eyes of most traders, hedge funds are perceived as underperforming, old financial vehicles of the past. While there are greater than 8000 funds trading today, We choose to focus on the bigwigs of this club, about 850 funds. Most estimates calculate that this group of people watch over the lion’s share of all hedge funds’ total capital, and by keeping an eye on their finest investments, Insider Monkey has spotted a few investment strategies that have historically beaten the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind we’re going to check out the latest hedge fund action surrounding Plains GP Holdings LP (NYSE:PAGP).

How are hedge funds trading Plains GP Holdings LP (NYSE:PAGP)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from one quarter earlier. On the other hand, there were a total of 16 hedge funds with a bullish position in PAGP a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Among these funds, D E Shaw held the most valuable stake in Plains GP Holdings LP (NYSE:PAGP), which was worth $17.9 million at the end of the third quarter. On the second spot was Deep Basin Capital which amassed $12.8 million worth of shares. Millennium Management, Citadel Investment Group, and Marshall Wace LLP 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 Deep Basin Capital allocated the biggest weight to Plains GP Holdings LP (NYSE:PAGP), around 3.24% of its 13F portfolio. Yaupon Capital is also relatively very bullish on the stock, earmarking 1.81 percent of its 13F equity portfolio to PAGP.

Seeing as Plains GP Holdings LP (NYSE:PAGP) has witnessed bearish sentiment from the smart money, it’s easy to see that there is a sect of hedgies that elected to cut their entire stakes in the first quarter. Interestingly, Anand Parekh’s Alyeska Investment Group said goodbye to the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising about $32.5 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $16.8 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 4 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Plains GP Holdings LP (NYSE:PAGP) but similarly valued. We will take a look at Magnolia Oil & Gas Corporation (NYSE:MGY), Independent Bank Group Inc (NASDAQ:IBTX), DiamondRock Hospitality Company (NYSE:DRH), and Terex Corporation (NYSE:TEX). This group of stocks’ market values are similar to PAGP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MGY 20 47544 2
IBTX 20 74143 -3
DRH 16 38994 -1
TEX 21 147440 -1
Average 19.25 77030 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $88 million in PAGP’s case. Terex Corporation (NYSE:TEX) is the most popular stock in this table. On the other hand DiamondRock Hospitality Company (NYSE:DRH) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Plains GP Holdings LP (NYSE:PAGP) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PAGP as the stock returned 61.7% in Q2 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.

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