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Did Hedge Funds Make The Right Call On Occidental Petroleum Corporation (OXY) ?

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 Occidental Petroleum Corporation (NYSE:OXY) and determine whether hedge funds had an edge regarding this stock.

Occidental Petroleum Corporation (NYSE:OXY) was in 35 hedge funds’ portfolios at the end of March. OXY investors should be aware of a decrease in activity from the world’s largest hedge funds lately. There were 44 hedge funds in our database with OXY holdings at the end of the previous quarter. Our calculations also showed that OXY 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 58 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

FAIRHOLME (FAIRX) Bruce Berkowitz

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to go over the fresh hedge fund action regarding Occidental Petroleum Corporation (NYSE:OXY).

How have hedgies been trading Occidental Petroleum Corporation (NYSE:OXY)?

Heading into the second quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. The graph below displays the number of hedge funds with bullish position in OXY over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is OXY A Good Stock To Buy?

More specifically, Icahn Capital LP was the largest shareholder of Occidental Petroleum Corporation (NYSE:OXY), with a stake worth $1026.3 million reported as of the end of September. Trailing Icahn Capital LP was Berkshire Hathaway, which amassed a stake valued at $219.2 million. Renaissance Technologies, Millennium Management, and Citadel Investment Group 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 Icahn Capital LP allocated the biggest weight to Occidental Petroleum Corporation (NYSE:OXY), around 5.7% of its 13F portfolio. Stamos Capital is also relatively very bullish on the stock, earmarking 1.92 percent of its 13F equity portfolio to OXY.

Seeing as Occidental Petroleum Corporation (NYSE:OXY) has witnessed declining sentiment from hedge fund managers, logic holds that there exists a select few hedgies that decided to sell off their full holdings by the end of the first quarter. Interestingly, Todd J. Kantor’s Encompass Capital Advisors sold off the largest position of the 750 funds watched by Insider Monkey, worth close to $46.4 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also cut its stock, about $24.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 9 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Occidental Petroleum Corporation (NYSE:OXY). These stocks are Pembina Pipeline Corp (NYSE:PBA), Icahn Enterprises LP (NASDAQ:IEP), Ingersoll Rand Inc. (NYSE:IR), and CenturyLink, Inc. (NYSE:CTL). This group of stocks’ market values match OXY’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PBA 15 52363 -2
IEP 3 9602364 -1
IR 33 490015 -14
CTL 34 774832 0
Average 21.25 2729894 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $2730 million. That figure was $1385 million in OXY’s case. CenturyLink, Inc. (NYSE:CTL) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Occidental Petroleum Corporation (NYSE:OXY) 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 OXY as the stock returned 58.1% 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.