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Were Hedge Funds Right About Marathon Petroleum Corp (MPC) ?

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 Marathon Petroleum Corp (NYSE:MPC) and determine whether hedge funds had an edge regarding this stock.

Is Marathon Petroleum Corp (NYSE:MPC) a bargain? Money managers were in a pessimistic mood. The number of long hedge fund bets went down by 12 lately. Our calculations also showed that MPC 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). MPC was in 57 hedge funds’ portfolios at the end of March. There were 69 hedge funds in our database with MPC positions at the end of the previous quarter.

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 58 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Keith Meister of Corvex Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 take a glance at the new hedge fund action encompassing Marathon Petroleum Corp (NYSE:MPC).

What have hedge funds been doing with Marathon Petroleum Corp (NYSE:MPC)?

At Q1’s end, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MPC over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MPC A Good Stock To Buy?

The largest stake in Marathon Petroleum Corp (NYSE:MPC) was held by Elliott Management, which reported holding $228.4 million worth of stock at the end of September. It was followed by Whitebox Advisors with a $105.9 million position. Other investors bullish on the company included Iridian Asset Management, Empyrean Capital Partners, and Steadfast Capital Management. In terms of the portfolio weights assigned to each position Yaupon Capital allocated the biggest weight to Marathon Petroleum Corp (NYSE:MPC), around 5.84% of its 13F portfolio. Empyrean Capital Partners is also relatively very bullish on the stock, dishing out 5.65 percent of its 13F equity portfolio to MPC.

Judging by the fact that Marathon Petroleum Corp (NYSE:MPC) has experienced a decline in interest from the smart money, it’s easy to see that there lies a certain “tier” of hedgies that elected to cut their full holdings by the end of the first quarter. At the top of the heap, Renaissance Technologies dropped the largest position of the 750 funds tracked by Insider Monkey, comprising about $144.1 million in stock. Michael Lowenstein’s fund, Kensico Capital, also sold off its stock, about $134.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 12 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Marathon Petroleum Corp (NYSE:MPC) but similarly valued. These stocks are Check Point Software Technologies Ltd. (NASDAQ:CHKP), IAC/InterActiveCorp (NASDAQ:IAC), Skyworks Solutions Inc (NASDAQ:SWKS), and BioMarin Pharmaceutical Inc. (NASDAQ:BMRN). This group of stocks’ market values resemble MPC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHKP 29 599085 -1
IAC 57 2692755 -14
SWKS 29 768807 -14
BMRN 54 1567492 5
Average 42.25 1407035 -6

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.25 hedge funds with bullish positions and the average amount invested in these stocks was $1407 million. That figure was $997 million in MPC’s case. IAC/InterActiveCorp (NASDAQ:IAC) is the most popular stock in this table. On the other hand Check Point Software Technologies Ltd. (NASDAQ:CHKP) is the least popular one with only 29 bullish hedge fund positions. Marathon Petroleum Corp (NYSE:MPC) 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MPC as the stock returned 60.9% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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