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Were Hedge Funds Right About Magellan Midstream Partners, L.P. (MMP)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Magellan Midstream Partners, L.P. (NYSE:MMP) and determine whether hedge funds had an edge regarding this stock.

Is Magellan Midstream Partners, L.P. (NYSE:MMP) a healthy stock for your portfolio? Prominent investors were taking a bearish view. The number of long hedge fund bets shrunk by 3 in recent months. Our calculations also showed that MMP isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). MMP was in 13 hedge funds’ portfolios at the end of March. There were 16 hedge funds in our database with MMP positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In today’s marketplace there are tons of indicators stock traders have at their disposal to evaluate publicly traded companies. A pair of the most innovative indicators are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the best hedge fund managers can outclass the broader indices by a significant amount (see the details here).

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 15 largest gold producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the latest hedge fund action surrounding Magellan Midstream Partners, L.P. (NYSE:MMP).

What have hedge funds been doing with Magellan Midstream Partners, L.P. (NYSE:MMP)?

At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in MMP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Moore Global Investments was the largest shareholder of Magellan Midstream Partners, L.P. (NYSE:MMP), with a stake worth $23.1 million reported as of the end of September. Trailing Moore Global Investments was Heronetta Management, which amassed a stake valued at $9.2 million. Citadel Investment Group, Locust Wood Capital Advisers, and Arrowstreet Capital 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 Heronetta Management allocated the biggest weight to Magellan Midstream Partners, L.P. (NYSE:MMP), around 10.95% of its 13F portfolio. Lucas Capital Management is also relatively very bullish on the stock, designating 2.28 percent of its 13F equity portfolio to MMP.

Due to the fact that Magellan Midstream Partners, L.P. (NYSE:MMP) has experienced declining sentiment from the smart money, we can see that there is a sect of hedge funds who were dropping their entire stakes in the first quarter. At the top of the heap, John Osterweis’s Osterweis Capital Management dropped the largest investment of the 750 funds watched by Insider Monkey, comprising close to $17 million in stock, and Alec Litowitz and Ross Laser’s Magnetar Capital was right behind this move, as the fund cut about $5.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Magellan Midstream Partners, L.P. (NYSE:MMP) but similarly valued. These stocks are Franklin Resources, Inc. (NYSE:BEN), WPP Plc (NYSE:WPP), Lyft, Inc. (NASDAQ:LYFT), and Packaging Corporation Of America (NYSE:PKG). This group of stocks’ market valuations resemble MMP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BEN 32 331380 -5
WPP 5 29321 -2
LYFT 31 389490 -14
PKG 23 105812 5
Average 22.75 214001 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $53 million in MMP’s case. Franklin Resources, Inc. (NYSE:BEN) is the most popular stock in this table. On the other hand WPP Plc (NYSE:WPP) is the least popular one with only 5 bullish hedge fund positions. Magellan Midstream Partners, L.P. (NYSE:MMP) is not the least popular stock in this group but hedge fund interest is still below 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on MMP, though not to the same extent, as the stock returned 19.9% during the second quarter and outperformed the market.

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