Should You Follow the Swarms of Hedge Funds Back Into XPO Logistics Inc (XPO)?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

XPO Logistics Inc (NYSE:XPO) was in 25 hedge funds’ portfolios at the end of September. XPO has seen an increase in hedge fund sentiment of late. There were 16 hedge funds in our database with XPO holdings at the end of the previous quarter. At the end of this article we will also compare XPO to other stocks including National Health Investors Inc (NYSE:NHI), American Eagle Outfitters (NYSE:AEO), and ITT Corp (NYSE:ITT) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

How have hedgies been trading XPO Logistics Inc (NYSE:XPO)?

Heading into the fourth quarter of 2016, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a 56% jump from the second quarter of 2016. However, as you can see in the chart below, hedge fund ownership is still significantly below where it was a year ago, after 65% of hedge funds axed their positions over the span of 3 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, William B. Gray’s Orbis Investment Management has the largest position in XPO Logistics Inc (NYSE:XPO), worth close to $771.1 million, accounting for 5.4% of its total 13F portfolio. Coming in second is Nine Ten Partners, managed by Brian Bares, Russell Mollen, and James Bradshaw, which holds a $90.2 million position; the fund has 31.1% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism contain Ken Griffin’s Citadel Investment Group, Dmitry Balyasny’s Balyasny Asset Management and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

As one would reasonably expect, key money managers have been driving this bullishness. Balyasny Asset Management initiated the most valuable position in XPO Logistics Inc (NYSE:XPO). Balyasny Asset Management had $25.8 million invested in the company at the end of the quarter. Arrowstreet Capital also made a $24.6 million investment in the stock during the quarter. The following funds were also among the new XPO investors: Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital, Mike Masters’ Masters Capital Management, and D E Shaw.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as XPO Logistics Inc (NYSE:XPO) but similarly valued. We will take a look at National Health Investors Inc (NYSE:NHI), American Eagle Outfitters (NYSE:AEO), ITT Corp (NYSE:ITT), and PS Business Parks Inc (NYSE:PSB). This group of stocks’ market caps match XPO’s market cap.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $1.09 billion in XPO’s case. American Eagle Outfitters (NYSE:AEO) is the most popular stock in this table. On the other hand PS Business Parks Inc (NYSE:PSB) is the least popular one with only 7 bullish hedge fund positions. XPO Logistics Inc (NYSE:XPO) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal, in addition to the huge amount of money invested in the stock compared to others with a similar market cap. Given that, it may be wise to consider following hedge funds back into XPO.

Disclosure: None