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Should I Buy Royal Dutch Shell plc (RDS)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Royal Dutch Shell plc (NYSE:RDS) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Royal Dutch Shell plc (NYSE:RDS) has experienced an increase in hedge fund sentiment in recent months. Royal Dutch Shell plc (NYSE:RDS) was in 34 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. There were 28 hedge funds in our database with RDS holdings at the end of March. Our calculations also showed that RDS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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.

Steven Cohen of Point72 Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Now we’re going to take a gander at the recent hedge fund action encompassing Royal Dutch Shell plc (NYSE:RDS).

How are hedge funds trading Royal Dutch Shell plc (NYSE:RDS)?

At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RDS over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Royal Dutch Shell plc (NYSE:RDS) was held by Fisher Asset Management, which reported holding $498.6 million worth of stock at the end of September. It was followed by Pzena Investment Management with a $119.9 million position. Other investors bullish on the company included Point72 Asset Management, Orbis Investment Management, and Millennium Management. In terms of the portfolio weights assigned to each position Covalis Capital allocated the biggest weight to Royal Dutch Shell plc (NYSE:RDS), around 4.53% of its 13F portfolio. Stamos Capital is also relatively very bullish on the stock, dishing out 2.6 percent of its 13F equity portfolio to RDS.

As one would reasonably expect, specific money managers were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, established the biggest position in Royal Dutch Shell plc (NYSE:RDS). Point72 Asset Management had $102.1 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $47.6 million investment in the stock during the quarter. The following funds were also among the new RDS investors: D. E. Shaw’s D E Shaw, Ken Griffin’s Citadel Investment Group, and Vince Maddi and Shawn Brennan’s SIR Capital Management.

Let’s check out hedge fund activity in other stocks similar to Royal Dutch Shell plc (NYSE:RDS). These stocks are NextEra Energy, Inc. (NYSE:NEE), Texas Instruments Incorporated (NASDAQ:TXN), Union Pacific Corporation (NYSE:UNP), American Tower Corporation (NYSE:AMT), Shopify Inc (NYSE:SHOP), Linde plc (NYSE:LIN), and Philip Morris International Inc. (NYSE:PM). This group of stocks’ market valuations are closest to RDS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NEE 55 1943660 3
TXN 55 2131731 9
UNP 68 3685933 5
AMT 61 4407292 4
SHOP 57 5916379 14
LIN 52 3643095 -1
PM 53 2574980 5
Average 57.3 3471867 5.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 57.3 hedge funds with bullish positions and the average amount invested in these stocks was $3472 million. That figure was $1165 million in RDS’s case. Union Pacific Corporation (NYSE:UNP) is the most popular stock in this table. On the other hand Linde plc (NYSE:LIN) is the least popular one with only 52 bullish hedge fund positions. Compared to these stocks Royal Dutch Shell plc (NYSE:RDS) is even less popular than LIN. Our overall hedge fund sentiment score for RDS is -20.1. 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 dodged a bullet by taking a bearish stance towards RDS. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August but managed to beat the market by 23.2 percentage points. Unfortunately RDS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); RDS investors were disappointed as the stock returned -8.3% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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