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Here is What Hedge Funds Really Think About Phillips 66 (PSX)

Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Phillips 66 (NYSE:PSX) investors should pay attention to a decrease in hedge fund sentiment lately. Our calculations also showed that PSX isn’t among the 30 most popular stocks among hedge funds (see the video at the end of this article).

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 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.

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. Let’s take a peek at the recent hedge fund action surrounding Phillips 66 (NYSE:PSX).

How are hedge funds trading Phillips 66 (NYSE:PSX)?

At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. By comparison, 37 hedge funds held shares or bullish call options in PSX a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with PSX Positions

The largest stake in Phillips 66 (NYSE:PSX) was held by Berkshire Hathaway, which reported holding $519.4 million worth of stock at the end of March. It was followed by AQR Capital Management with a $169.7 million position. Other investors bullish on the company included D E Shaw, Two Sigma Advisors, and East Side Capital (RR Partners).

Since Phillips 66 (NYSE:PSX) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of money managers that decided to sell off their positions entirely heading into Q3. At the top of the heap, Ken Heebner’s Capital Growth Management sold off the largest investment of the 750 funds followed by Insider Monkey, comprising close to $45.2 million in stock, and David Costen Haley’s HBK Investments was right behind this move, as the fund sold off about $14.3 million worth. These moves are interesting, as aggregate hedge fund interest fell by 4 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Phillips 66 (NYSE:PSX) but similarly valued. These stocks are Equinix, Inc. (REIT) (NASDAQ:EQIX), Telefonica S.A. (NYSE:TEF), ABB Ltd (NYSE:ABB), and Capital One Financial Corporation (NYSE:COF). This group of stocks’ market values match PSX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EQIX 38 1709515 0
TEF 7 44428 -3
ABB 13 325021 -2
COF 42 2009156 -2
Average 25 1022030 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $1022 million. That figure was $1283 million in PSX’s case. Capital One Financial Corporation (NYSE:COF) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 7 bullish hedge fund positions. Phillips 66 (NYSE:PSX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on PSX as the stock returned 10.5% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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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