Do Hedge Funds Love Royal Dutch Shell?

Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees during the first half of 2019 amid Powell’s pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the second quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Royal Dutch Shell plc (NYSE:RDS).

Royal Dutch Shell plc (NYSE:RDS) shareholders have witnessed a slight increase in hedge fund interest in recent months. Our calculations also showed that RDS isn’t among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

John Overdeck of Two Sigma

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to go over the key hedge fund action surrounding Royal Dutch Shell plc (NYSE:RDS).

Hedge fund activity in Royal Dutch Shell plc (NYSE:RDS)

Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. On the other hand, there were a total of 39 hedge funds with a bullish position in RDS a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

No of Hedge Funds with RDS Positions

More specifically, Fisher Asset Management was the largest shareholder of Royal Dutch Shell plc (NYSE:RDS), with a stake worth $901.6 million reported as of the end of March. Trailing Fisher Asset Management was Pzena Investment Management, which amassed a stake valued at $202.6 million. Orbis Investment Management, Two Sigma Advisors, and Pittencrieff Partners – Gabalex Capital were also very fond of the stock, giving the stock large weights in their portfolios.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Royal Dutch Shell plc (NYSE:RDS) headfirst. Perella Weinberg Partners established the biggest position in Royal Dutch Shell plc (NYSE:RDS). Perella Weinberg Partners had $8.7 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $2.4 million investment in the stock during the quarter. The other funds with brand new RDS positions are BP Capital, Mike Vranos’s Ellington, and Thomas Bailard’s Bailard Inc.

Let’s check out hedge fund activity in other stocks similar to Royal Dutch Shell plc (NYSE:RDS). These stocks are The Walt Disney Company (NYSE:DIS), AT&T Inc. (NYSE:T), Pfizer Inc. (NYSE:PFE), and Verizon Communications Inc. (NYSE:VZ). This group of stocks’ market valuations resemble RDS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DIS 113 6386742 -1
T 42 1009051 1
PFE 52 4519828 -1
VZ 54 1589094 2
Average 65.25 3376179 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 65.25 hedge funds with bullish positions and the average amount invested in these stocks was $3376 million. That figure was $1465 million in RDS’s case. The Walt Disney Company (NYSE:DIS) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 42 bullish hedge fund positions. Compared to these stocks Royal Dutch Shell plc (NYSE:RDS) is even less popular than T. Hedge funds dodged a bullet by taking a bearish stance towards RDS. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately RDS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); RDS investors were disappointed as the stock returned -8% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

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