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Were Hedge Funds Right About Phillips 66 (PSX)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Phillips 66 (NYSE:PSX) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Phillips 66 (NYSE:PSX) has experienced a decrease in hedge fund interest lately. Our calculations also showed that PSX 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).

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

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 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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. Now let’s check out the latest hedge fund action surrounding Phillips 66 (NYSE:PSX).

What have hedge funds been doing with Phillips 66 (NYSE:PSX)?

At Q1’s end, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the fourth quarter of 2019. On the other hand, there were a total of 43 hedge funds with a bullish position in PSX a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Cliff Asness’s AQR Capital Management has the most valuable position in Phillips 66 (NYSE:PSX), worth close to $50.8 million, amounting to 0.1% of its total 13F portfolio. The second largest stake is held by D E Shaw, managed by D. E. Shaw, which holds a $50 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish include Israel Englander’s Millennium Management, John Overdeck and David Siegel’s Two Sigma Advisors and Todd J. Kantor’s Encompass Capital Advisors. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Phillips 66 (NYSE:PSX), around 9.98% of its 13F portfolio. East Side Capital (RR Partners) is also relatively very bullish on the stock, setting aside 7.11 percent of its 13F equity portfolio to PSX.

Judging by the fact that Phillips 66 (NYSE:PSX) has faced falling interest from hedge fund managers, it’s safe to say that there was a specific group of hedgies who were dropping their entire stakes by the end of the first quarter. Intriguingly, Renaissance Technologies dropped the largest stake of the 750 funds monitored by Insider Monkey, totaling about $214.2 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $51 million worth. These moves are important to note, as aggregate hedge fund interest fell by 3 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Phillips 66 (NYSE:PSX). We will take a look at NXP Semiconductors NV (NASDAQ:NXPI), Veeva Systems Inc (NYSE:VEEV), SYSCO Corporation (NYSE:SYY), and Capital One Financial Corp. (NYSE:COF). All of these stocks’ market caps are similar to PSX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NXPI 52 1234255 -28
VEEV 33 352902 -11
SYY 35 1783679 7
COF 50 1107098 0
Average 42.5 1119484 -8

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.5 hedge funds with bullish positions and the average amount invested in these stocks was $1119 million. That figure was $420 million in PSX’s case. NXP Semiconductors NV (NASDAQ:NXPI) is the most popular stock in this table. On the other hand Veeva Systems Inc (NYSE:VEEV) is the least popular one with only 33 bullish hedge fund positions. Phillips 66 (NYSE:PSX) 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 PSX as the stock returned 35.7% 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.