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Were Hedge Funds Right About Norfolk Southern Corp. (NSC)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of December. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Norfolk Southern Corp. (NYSE:NSC), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is Norfolk Southern Corp. (NYSE:NSC) the right pick for your portfolio? Money managers are turning bullish. The number of long hedge fund positions moved up by 2 in recent months. Our calculations also showed that NSC 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). NSC was in 52 hedge funds’ portfolios at the end of December. There were 50 hedge funds in our database with NSC holdings at the end of the previous quarter.

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 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. 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.

Aaron Cowen Suvretta Capital

Aaron Cowen of Suvretta Capital Management

Now let’s take a gander at the latest hedge fund action encompassing Norfolk Southern Corp. (NYSE:NSC).

How have hedgies been trading Norfolk Southern Corp. (NYSE:NSC)?

At the end of the fourth quarter, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards NSC over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Soroban Capital Partners held the most valuable stake in Norfolk Southern Corp. (NYSE:NSC), which was worth $513.5 million at the end of the third quarter. On the second spot was Millennium Management which amassed $155.4 million worth of shares. Senator Investment Group, Palestra Capital Management, and Viking Global 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 Lodge Hill Capital allocated the biggest weight to Norfolk Southern Corp. (NYSE:NSC), around 7.91% of its 13F portfolio. Soroban Capital Partners is also relatively very bullish on the stock, dishing out 6.73 percent of its 13F equity portfolio to NSC.

As one would reasonably expect, some big names have jumped into Norfolk Southern Corp. (NYSE:NSC) headfirst. Viking Global, managed by Andreas Halvorsen, established the largest position in Norfolk Southern Corp. (NYSE:NSC). Viking Global had $121.1 million invested in the company at the end of the quarter. Aaron Cowen’s Suvretta Capital Management also made a $105.2 million investment in the stock during the quarter. The other funds with brand new NSC positions are Robert Pitts’s Steadfast Capital Management, Steve Cohen’s Point72 Asset Management, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management.

Let’s check out hedge fund activity in other stocks similar to Norfolk Southern Corp. (NYSE:NSC). We will take a look at Suncor Energy Inc. (NYSE:SU), HCA Healthcare Inc (NYSE:HCA), TC Energy Corporation (NYSE:TRP), and Equinix Inc (REIT) (NASDAQ:EQIX). This group of stocks’ market valuations resemble NSC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SU 39 1487356 -2
HCA 63 3585533 3
TRP 22 210177 2
EQIX 43 1639342 3
Average 41.75 1730602 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.75 hedge funds with bullish positions and the average amount invested in these stocks was $1731 million. That figure was $1931 million in NSC’s case. HCA Healthcare Inc (NYSE:HCA) is the most popular stock in this table. On the other hand TC Energy Corporation (NYSE:TRP) is the least popular one with only 22 bullish hedge fund positions. Norfolk Southern Corp. (NYSE:NSC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 beat the market by 12.9 percentage points. Unfortunately NSC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NSC were disappointed as the stock returned -11.7% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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.

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