In this article we are going to use hedge fund sentiment as a tool and determine whether Plains All American Pipeline, L.P. (NYSE:PAA) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is Plains All American Pipeline, L.P. (NYSE:PAA) a good stock to buy now? The smart money was cutting their exposure. The number of long hedge fund bets retreated by 1 recently. Plains All American Pipeline, L.P. (NYSE:PAA) was in 8 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 19. Our calculations also showed that PAA isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. You can subscribe to our free daily newsletter on our website. Keeping this in mind let’s take a peek at the latest hedge fund action surrounding Plains All American Pipeline, L.P. (NYSE:PAA).
How have hedgies been trading Plains All American Pipeline, L.P. (NYSE:PAA)?
At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PAA over the last 21 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of Plains All American Pipeline, L.P. (NYSE:PAA), with a stake worth $28.7 million reported as of the end of September. Trailing Arrowstreet Capital was Zimmer Partners, which amassed a stake valued at $4.7 million. MFP Investors, Citadel Investment Group, 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 Heronetta Management allocated the biggest weight to Plains All American Pipeline, L.P. (NYSE:PAA), around 1.27% of its 13F portfolio. MFP Investors is also relatively very bullish on the stock, dishing out 0.45 percent of its 13F equity portfolio to PAA.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace LLP. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified PAA as a viable investment and initiated a position in the stock.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Plains All American Pipeline, L.P. (NYSE:PAA) but similarly valued. These stocks are Everbridge, Inc. (NASDAQ:EVBG), Advanced Drainage Systems Inc. (NYSE:WMS), Mercury Systems Inc (NASDAQ:MRCY), Tapestry, Inc. (NYSE:TPR), Navistar International Corp (NYSE:NAV), Littelfuse, Inc. (NASDAQ:LFUS), and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). This group of stocks’ market valuations are closest to PAA’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $838 million. That figure was $39 million in PAA’s case. Navistar International Corp (NYSE:NAV) is the most popular stock in this table. On the other hand Mercury Systems Inc (NASDAQ:MRCY) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Plains All American Pipeline, L.P. (NYSE:PAA) is even less popular than MRCY. Our overall hedge fund sentiment score for PAA is 16.6. 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. Hedge funds clearly dropped the ball on PAA as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. A small number of hedge funds were also right about betting on PAA as the stock returned 43.1% since Q3 (through December 2nd) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.