Hedge Funds Were Selling Plains All American Pipeline, L.P. (PAA) 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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Plains All American Pipeline, L.P. (NYSE:PAA).

Plains All American Pipeline, L.P. (NYSE:PAA) investors should be aware of a decrease in hedge fund interest of late. PAA was in 12 hedge funds’ portfolios at the end of December. There were 17 hedge funds in our database with PAA holdings at the end of the previous quarter. Our calculations also showed that PAA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

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

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 S&P 500 ETFs by more than 41 percentage points since March 2017 (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 stocks that are in our short portfolio.

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 let’s review the fresh hedge fund action encompassing Plains All American Pipeline, L.P. (NYSE:PAA).

How have hedgies been trading Plains All American Pipeline, L.P. (NYSE:PAA)?

At Q4’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PAA over the last 18 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Zimmer Partners held the most valuable stake in Plains All American Pipeline, L.P. (NYSE:PAA), which was worth $61.7 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $39.9 million worth of shares. Magnetar Capital, MFP Investors, and Heronetta 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 BP Capital allocated the biggest weight to Plains All American Pipeline, L.P. (NYSE:PAA), around 5.05% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, designating 3.87 percent of its 13F equity portfolio to PAA.

Due to the fact that Plains All American Pipeline, L.P. (NYSE:PAA) has witnessed a decline in interest from the entirety of the hedge funds we track, logic holds that there exists a select few money managers that elected to cut their full holdings by the end of the third quarter. At the top of the heap, Nick Niell’s Arrowgrass Capital Partners dropped the largest position of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $2.1 million in call options. Gavin Saitowitz and Cisco J. del Valle’s fund, Springbok Capital, also sold off its call options, about $1.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Plains All American Pipeline, L.P. (NYSE:PAA). We will take a look at Galapagos NV (NASDAQ:GLPG), Darden Restaurants, Inc. (NYSE:DRI), Tenaris S.A. (NYSE:TS), and Atmos Energy Corporation (NYSE:ATO). All of these stocks’ market caps are closest to PAA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $383 million. That figure was $169 million in PAA’s case. Darden Restaurants, Inc. (NYSE:DRI) is the most popular stock in this table. On the other hand Galapagos NV (NASDAQ:GLPG) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Plains All American Pipeline, L.P. (NYSE:PAA) is even less popular than GLPG. Hedge funds dodged a bullet by taking a bearish stance towards PAA. 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 PAA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PAA investors were disappointed as the stock returned -69.9% 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.

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