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Were Hedge Funds Right About Flocking Into Shell Midstream Partners LP (SHLX) ?

The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of Shell Midstream Partners LP (NYSE:SHLX) and find out how it is affected by hedge funds’ moves.

Is Shell Midstream Partners LP (NYSE:SHLX) a buy right now? Prominent investors are in a bullish mood. The number of long hedge fund positions moved up by 2 lately. Our calculations also showed that SHLX isn’t among the 30 most popular stocks among hedge funds. SHLX was in 8 hedge funds’ portfolios at the end of December. There were 6 hedge funds in our database with SHLX positions 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’ 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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BP CAPITAL

Let’s take a glance at the key hedge fund action surrounding Shell Midstream Partners LP (NYSE:SHLX).

How have hedgies been trading Shell Midstream Partners LP (NYSE:SHLX)?

At Q4’s end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in SHLX over the last 14 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

SHLX_apr2019

The largest stake in Shell Midstream Partners LP (NYSE:SHLX) was held by Wexford Capital, which reported holding $9.9 million worth of stock at the end of September. It was followed by Zimmer Partners with a $5.7 million position. Other investors bullish on the company included BP Capital, PEAK6 Capital Management, and Citadel Investment Group.

As one would reasonably expect, key hedge funds have been driving this bullishness. Wexford Capital, managed by Charles Davidson and Joseph Jacobs, assembled the most valuable position in Shell Midstream Partners LP (NYSE:SHLX). Wexford Capital had $9.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $0.3 million investment in the stock during the quarter. The only other fund with a new position in the stock is Ken Griffin’s Citadel Investment Group.

Let’s also examine hedge fund activity in other stocks similar to Shell Midstream Partners LP (NYSE:SHLX). We will take a look at Alteryx, Inc. (NYSE:AYX), Equity Commonwealth (NYSE:EQC), First Industrial Realty Trust, Inc. (NYSE:FR), and Valvoline Inc. (NYSE:VVV). This group of stocks’ market caps are similar to SHLX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AYX 29 526112 3
EQC 17 212173 0
FR 18 312949 2
VVV 18 344112 3
Average 20.5 348837 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $349 million. That figure was $26 million in SHLX’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand Equity Commonwealth (NYSE:EQC) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Shell Midstream Partners LP (NYSE:SHLX) is even less popular than EQC. Hedge funds clearly dropped the ball on SHLX as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on SHLX as the stock returned 29% and outperformed the market by an even larger margin.

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

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