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Did Hedge Funds Make The Right Call On Targa Resources Corp (TRGP) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtTarga Resources Corp (NYSE:TRGP) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Targa Resources Corp (NYSE:TRGP) a bargain? The smart money was getting more bullish. The number of bullish hedge fund positions moved up by 2 lately. Our calculations also showed that TRGP 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

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. With all of this in mind let’s take a glance at the new hedge fund action surrounding Targa Resources Corp (NYSE:TRGP).

What have hedge funds been doing with Targa Resources Corp (NYSE:TRGP)?

At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in TRGP a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Targa Resources Corp (NYSE:TRGP). Citadel Investment Group has a $45.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund is Renaissance Technologies, which holds a $14.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish contain Brandon Haley’s Holocene Advisors, Matt Smith’s Deep Basin Capital and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Yaupon Capital allocated the biggest weight to Targa Resources Corp (NYSE:TRGP), around 1.4% of its 13F portfolio. Deep Basin Capital is also relatively very bullish on the stock, designating 1.33 percent of its 13F equity portfolio to TRGP.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. AQR Capital Management, managed by Cliff Asness, assembled the biggest position in Targa Resources Corp (NYSE:TRGP). AQR Capital Management had $4.1 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $2.5 million investment in the stock during the quarter. The following funds were also among the new TRGP investors: Greg Eisner’s Engineers Gate Manager, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Steve Pattyn’s Yaupon Capital.

Let’s check out hedge fund activity in other stocks similar to Targa Resources Corp (NYSE:TRGP). These stocks are LATAM Airlines Group S.A. (NYSE:LTM), Capri Holdings Limited (NYSE:CPRI), Boyd Gaming Corporation (NYSE:BYD), and Fox Factory Holding Corp (NASDAQ:FOXF). This group of stocks’ market values are closest to TRGP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LTM 10 8139 -4
CPRI 29 280046 -11
BYD 26 179093 -4
FOXF 10 15115 -3
Average 18.75 120598 -5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $121 million. That figure was $104 million in TRGP’s case. Capri Holdings Limited (NYSE:CPRI) is the most popular stock in this table. On the other hand LATAM Airlines Group S.A. (NYSE:LTM) is the least popular one with only 10 bullish hedge fund positions. Targa Resources Corp (NYSE:TRGP) is not the most popular stock in this group but hedge fund interest is still above average. 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 gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on TRGP as the stock returned 192.8% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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