Hedge Funds Are Dumping Targa Resources Corp (TRGP)

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Targa Resources Corp (NYSE:TRGP)? The smart money sentiment can provide an answer to this question.

Targa Resources Corp (NYSE:TRGP) investors should pay attention to a decrease in hedge fund interest recently. TRGP was in 16 hedge funds’ portfolios at the end of September. There were 18 hedge funds in our database with TRGP holdings at the end of the previous quarter. Our calculations also showed that TRGP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the recent hedge fund action regarding Targa Resources Corp (NYSE:TRGP).

How have hedgies been trading Targa Resources Corp (NYSE:TRGP)?

Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TRGP over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in Targa Resources Corp (NYSE:TRGP), which was worth $63.1 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $47.8 million worth of shares. Holocene Advisors, Millennium Management, and Deep Basin Capital 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 BP Capital allocated the biggest weight to Targa Resources Corp (NYSE:TRGP), around 4.17% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, earmarking 2.6 percent of its 13F equity portfolio to TRGP.

Due to the fact that Targa Resources Corp (NYSE:TRGP) has witnessed declining sentiment from the smart money, it’s safe to say that there is a sect of money managers who sold off their full holdings by the end of the third quarter. At the top of the heap, Doug Silverman and Alexander Klabin’s Senator Investment Group cut the largest investment of the “upper crust” of funds watched by Insider Monkey, valued at close to $25.5 million in call options. Steve Pattyn’s fund, Yaupon Capital, also cut its call options, about $11.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 2 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Targa Resources Corp (NYSE:TRGP). These stocks are Iron Mountain Incorporated (NYSE:IRM), FactSet Research Systems Inc. (NYSE:FDS), National Retail Properties, Inc. (NYSE:NNN), and Liberty Media Corporation (NASDAQ:FWONA). This group of stocks’ market valuations are similar to TRGP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $242 million. That figure was $241 million in TRGP’s case. National Retail Properties, Inc. (NYSE:NNN) is the most popular stock in this table. On the other hand Iron Mountain Incorporated (NYSE:IRM) is the least popular one with only 14 bullish hedge fund positions. Targa Resources Corp (NYSE:TRGP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TRGP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TRGP investors were disappointed as the stock returned -7% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.

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