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Valero Energy Corporation (VLO): Hedge Funds Caught Wrong Footed

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Valero Energy Corporation (NYSE:VLO).

Valero Energy Corporation (NYSE:VLO) investors should pay attention to an increase in enthusiasm from smart money lately. Our calculations also showed that VLO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to check out the latest hedge fund action surrounding Valero Energy Corporation (NYSE:VLO).

How have hedgies been trading Valero Energy Corporation (NYSE:VLO)?

At Q4’s end, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards VLO over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Valero Energy Corporation (NYSE:VLO), with a stake worth $127.4 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $104 million. Two Sigma Advisors, Arosa Capital Management, and Citadel Investment Group 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 Arosa Capital Management allocated the biggest weight to Valero Energy Corporation (NYSE:VLO), around 11.61% of its 13F portfolio. Game Creek Capital is also relatively very bullish on the stock, dishing out 3.41 percent of its 13F equity portfolio to VLO.

Consequently, key money managers have jumped into Valero Energy Corporation (NYSE:VLO) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, established the most valuable position in Valero Energy Corporation (NYSE:VLO). Balyasny Asset Management had $45.2 million invested in the company at the end of the quarter. Sara Nainzadeh’s Centenus Global Management also made a $6.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Matthew Tewksbury’s Stevens Capital Management, Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, and Matthew L Pinz’s Pinz Capital.

Let’s also examine hedge fund activity in other stocks similar to Valero Energy Corporation (NYSE:VLO). These stocks are Canadian Natural Resources Limited (NYSE:CNQ), Dell Technologies Inc. (NYSE:DELL), Delta Air Lines, Inc. (NYSE:DAL), and Workday Inc (NASDAQ:WDAY). This group of stocks’ market caps resemble VLO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNQ 29 530611 -5
DELL 41 2361969 -6
DAL 70 7037405 -1
WDAY 55 2251111 11
Average 48.75 3045274 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.75 hedge funds with bullish positions and the average amount invested in these stocks was $3045 million. That figure was $636 million in VLO’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand Canadian Natural Resources Limited (NYSE:CNQ) is the least popular one with only 29 bullish hedge fund positions. Valero Energy Corporation (NYSE:VLO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately VLO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VLO investors were disappointed as the stock returned -41.2% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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