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Phillips 66 (PSX): Hedge Funds Cashed Out Too Early

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Phillips 66 (NYSE:PSX) undervalued? Money managers are in a bearish mood. The number of bullish hedge fund bets fell by 3 recently. Our calculations also showed that PSX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). PSX was in 36 hedge funds’ portfolios at the end of the third quarter of 2019. There were 39 hedge funds in our database with PSX positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Warren Buffett of Berkshire Hathaway

Warren Buffett of Berkshire Hathaway

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the key hedge fund action regarding Phillips 66 (NYSE:PSX).

What have hedge funds been doing with Phillips 66 (NYSE:PSX)?

At the end of the third quarter, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PSX over the last 17 quarters. 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

More specifically, Berkshire Hathaway was the largest shareholder of Phillips 66 (NYSE:PSX), with a stake worth $530.7 million reported as of the end of September. Trailing Berkshire Hathaway was AQR Capital Management, which amassed a stake valued at $192.7 million. D E Shaw, RR Partners, and Two Sigma Advisors 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 RR Partners allocated the biggest weight to Phillips 66 (NYSE:PSX), around 10.37% of its portfolio. Beech Hill Partners is also relatively very bullish on the stock, dishing out 2.18 percent of its 13F equity portfolio to PSX.

Due to the fact that Phillips 66 (NYSE:PSX) has witnessed falling interest from the aggregate hedge fund industry, we can see that there exists a select few fund managers who were dropping their positions entirely in the third quarter. At the top of the heap, Joel Greenblatt’s Gotham Asset Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling an estimated $34 million in stock, and Vince Maddi and Shawn Brennan’s SIR Capital Management was right behind this move, as the fund sold off about $22.5 million worth. These moves are interesting, as total hedge fund interest fell by 3 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Phillips 66 (NYSE:PSX) but similarly valued. These stocks are Honda Motor Co Ltd (NYSE:HMC), Edwards Lifesciences Corporation (NYSE:EW), Aon plc (NYSE:AON), and The Progressive Corporation (NYSE:PGR). This group of stocks’ market caps resemble PSX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HMC 10 129921 3
EW 34 1384665 1
AON 42 2479390 8
PGR 48 1562764 -2
Average 33.5 1389185 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $1389 million. That figure was $1315 million in PSX’s case. The Progressive Corporation (NYSE:PGR) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 10 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on PSX as the stock returned 12.9% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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