Were Hedge Funds Right About Air Products & Chemicals, Inc. (APD)?

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Air Products & Chemicals, Inc. (NYSE:APD) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Air Products & Chemicals, Inc. (NYSE:APD) undervalued? Investors who are in the know are buying. The number of bullish hedge fund bets moved up by 13 recently. Our calculations also showed that APD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). APD was in 54 hedge funds’ portfolios at the end of December. There were 41 hedge funds in our database with APD holdings at the end of the previous quarter.

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 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 41 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

Keeping this in mind we’re going to analyze the new hedge fund action encompassing Air Products & Chemicals, Inc. (NYSE:APD).

How have hedgies been trading Air Products & Chemicals, Inc. (NYSE:APD)?

At the end of the fourth quarter, a total of 54 of the hedge funds tracked by Insider Monkey were long this stock, a change of 32% from the third quarter of 2019. On the other hand, there were a total of 36 hedge funds with a bullish position in APD a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, Adage Capital Management was the largest shareholder of Air Products & Chemicals, Inc. (NYSE:APD), with a stake worth $89.5 million reported as of the end of September. Trailing Adage Capital Management was Two Sigma Advisors, which amassed a stake valued at $80.9 million. Citadel Investment Group, Luminus Management, and AQR Capital 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 Freshford Capital Management allocated the biggest weight to Air Products & Chemicals, Inc. (NYSE:APD), around 9.15% of its 13F portfolio. Claar Advisors is also relatively very bullish on the stock, setting aside 7.42 percent of its 13F equity portfolio to APD.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Air Products & Chemicals, Inc. (NYSE:APD) headfirst. Echo Street Capital Management, managed by Greg Poole, assembled the biggest position in Air Products & Chemicals, Inc. (NYSE:APD). Echo Street Capital Management had $39.7 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $20.8 million position during the quarter. The following funds were also among the new APD investors: Andrew Byington’s Appian Way Asset Management, Michael Cowley’s Sandbar Asset Management, and Minhua Zhang’s Weld Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Air Products & Chemicals, Inc. (NYSE:APD) but similarly valued. We will take a look at Vodafone Group Plc (NASDAQ:VOD), Intercontinental Exchange Inc (NYSE:ICE), JD.Com Inc (NASDAQ:JD), and ABB Ltd (NYSE:ABB). This group of stocks’ market valuations match APD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VOD 16 758597 -4
ICE 52 2712531 3
JD 63 6041314 3
ABB 10 372334 -3
Average 35.25 2471194 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $2471 million. That figure was $737 million in APD’s case. JD.Com Inc (NASDAQ:JD) is the most popular stock in this table. On the other hand ABB Ltd (NYSE:ABB) is the least popular one with only 10 bullish hedge fund positions. Air Products & Chemicals, Inc. (NYSE:APD) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. Hedge funds were also right about betting on APD, though not to the same extent, as the stock returned -4.8% during the first four months of 2020 (through May 1st) and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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