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Hedge Funds Are Buying Southwest Airlines Co. (LUV)

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.

Is Southwest Airlines Co. (NYSE:LUV) an excellent investment now? Hedge funds were turning bullish. The number of bullish hedge fund bets advanced by 11 recently. Southwest Airlines Co. (NYSE:LUV) was in 56 hedge funds’ portfolios at the end of June. The all time high for this statistics is 58. Our calculations also showed that LUV isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Crispin Odey of Odey Asset Management Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a peek at the latest hedge fund action regarding Southwest Airlines Co. (NYSE:LUV).

Hedge fund activity in Southwest Airlines Co. (NYSE:LUV)

Heading into the third quarter of 2020, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from one quarter earlier. On the other hand, there were a total of 33 hedge funds with a bullish position in LUV 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.

Among these funds, Millennium Management held the most valuable stake in Southwest Airlines Co. (NYSE:LUV), which was worth $130.5 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $102.4 million worth of shares. Lansdowne Partners, PAR Capital 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 Odey Asset Management Group allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 5.73% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, earmarking 3.67 percent of its 13F equity portfolio to LUV.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Lansdowne Partners, managed by Alex Snow, initiated the largest position in Southwest Airlines Co. (NYSE:LUV). Lansdowne Partners had $87.9 million invested in the company at the end of the quarter. William B. Gray’s Orbis Investment Management also made a $47.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Crispin Odey’s Odey Asset Management Group, and Principal Global Investors’s Columbus Circle Investors.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Southwest Airlines Co. (NYSE:LUV) but similarly valued. These stocks are Corteva, Inc. (NYSE:CTVA), Old Dominion Freight Line, Inc. (NASDAQ:ODFL), ZoomInfo Technologies Inc. (NASDAQ:ZI), PPL Corporation (NYSE:PPL), Edison International (NYSE:EIX), Wheaton Precious Metals Corp. (NYSE:WPM), and Corning Incorporated (NYSE:GLW). This group of stocks’ market caps are closest to LUV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CTVA 39 775291 3
ODFL 35 480042 2
ZI 24 157040 24
PPL 25 159807 -3
EIX 37 1670961 8
WPM 21 767509 -4
GLW 28 147576 -2
Average 29.9 594032 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $594 million. That figure was $874 million in LUV’s case. Corteva, Inc. (NYSE:CTVA) is the most popular stock in this table. On the other hand Wheaton Precious Metals Corp. (NYSE:WPM) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Southwest Airlines Co. (NYSE:LUV) is more popular among hedge funds. Our overall hedge fund sentiment score for LUV is 89. 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. 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 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately LUV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LUV were disappointed as the stock returned 8% since the end of the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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