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Hedge Funds Were Getting Burned By Targa Resources Corp (TRGP) Before The Coronavirus

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 an increase in hedge fund interest in recent months. TRGP was in 27 hedge funds’ portfolios at the end of December. 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 Q4 rankings and see the video at the end of this article for Q3 rankings).

In the eyes of most market participants, hedge funds are seen as underperforming, outdated investment tools of years past. While there are over 8000 funds trading at present, Our researchers look at the upper echelon of this club, around 850 funds. These money managers administer the lion’s share of the hedge fund industry’s total capital, and by shadowing their inimitable stock picks, Insider Monkey has uncovered a number of investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Steven Cohen

Steven Cohen of Point72 Asset Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a peek at the key hedge fund action surrounding Targa Resources Corp (NYSE:TRGP).

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

At Q4’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in TRGP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (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 $80 million at the end of the third quarter. On the second spot was Holocene Advisors which amassed $68.5 million worth of shares. Millennium Management, Deep Basin Capital, and Point72 Asset Management 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 Deep Basin Capital allocated the biggest weight to Targa Resources Corp (NYSE:TRGP), around 3.89% of its 13F portfolio. BP Capital is also relatively very bullish on the stock, dishing out 3.08 percent of its 13F equity portfolio to TRGP.

Now, key money managers have jumped into Targa Resources Corp (NYSE:TRGP) headfirst. D E Shaw, managed by D. E. Shaw, initiated the biggest position in Targa Resources Corp (NYSE:TRGP). D E Shaw had $21.8 million invested in the company at the end of the quarter. Sara Nainzadeh’s Centenus Global Management also made a $7.1 million investment in the stock during the quarter. The other funds with brand new TRGP positions are Renaissance Technologies, Noam Gottesman’s GLG Partners, and Michael Gelband’s ExodusPoint Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Targa Resources Corp (NYSE:TRGP) but similarly valued. These stocks are Teck Resources Ltd (NYSE:TECK), Vipshop Holdings Limited (NYSE:VIPS), Ceridian HCM Holding Inc. (NYSE:CDAY), and Liberty Property Trust (NYSE:LPT). All of these stocks’ market caps are similar to TRGP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TECK 30 687927 10
VIPS 27 403120 3
CDAY 31 1544063 1
LPT 31 596139 -1
Average 29.75 807812 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $808 million. That figure was $347 million in TRGP’s case. Ceridian HCM Holding Inc. (NYSE:CDAY) is the most popular stock in this table. On the other hand Vipshop Holdings Limited (NYSE:VIPS) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Targa Resources Corp (NYSE:TRGP) is even less popular than VIPS. Hedge funds dodged a bullet by taking a bearish stance towards TRGP. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately TRGP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TRGP investors were disappointed as the stock returned -75.3% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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