Did The Smart Money Get Southwest Airlines Co. (LUV) Right?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Southwest Airlines Co. (NYSE:LUV) and determine whether hedge funds skillfully traded this stock.

Southwest Airlines Co. (NYSE:LUV) investors should be aware of a decrease in enthusiasm from smart money in recent months. Southwest Airlines Co. (NYSE:LUV) was in 39 hedge funds’ portfolios at the end of the third quarter of 2021. The all time high for this statistic is 58. There were 49 hedge funds in our database with LUV positions at the end of the second quarter. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s go over the recent hedge fund action surrounding Southwest Airlines Co. (NYSE:LUV).

Do Hedge Funds Think LUV Is A Good Stock To Buy Now?

At the end of September, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the second quarter of 2021. On the other hand, there were a total of 51 hedge funds with a bullish position in LUV a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Southwest Airlines Co. (NYSE:LUV) was held by Citadel Investment Group, which reported holding $152.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $103.9 million position. Other investors bullish on the company included PAR Capital Management, Adage Capital Management, and Crake Asset Management. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 5.02% of its 13F portfolio. Falcon Edge Capital is also relatively very bullish on the stock, dishing out 3.86 percent of its 13F equity portfolio to LUV.

Judging by the fact that Southwest Airlines Co. (NYSE:LUV) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there were a few fund managers that slashed their entire stakes in the third quarter. It’s worth mentioning that Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners dumped the largest position of all the hedgies watched by Insider Monkey, valued at an estimated $68.1 million in stock, and Gregg Moskowitz’s Interval Partners was right behind this move, as the fund said goodbye to about $28.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 10 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). We will take a look at XPeng Inc. (NYSE:XPEV), Equity Residential (NYSE:EQR), Keysight Technologies Inc (NYSE:KEYS), Sun Life Financial Inc. (NYSE:SLF), D.R. Horton, Inc. (NYSE:DHI), The Kroger Co. (NYSE:KR), and Ameriprise Financial, Inc. (NYSE:AMP). This group of stocks’ market caps resemble LUV’s market cap.

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As you can see these stocks had an average of 32.1 hedge funds with bullish positions and the average amount invested in these stocks was $1341 million. That figure was $730 million in LUV’s case. D.R. Horton, Inc. (NYSE:DHI) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 8 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LUV is 51.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, LUV wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -13% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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