Were Hedge Funds Right About Souring On Union Pacific Corporation (UNP)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Union Pacific Corporation (NYSE:UNP) and determine whether the smart money was really smart about this stock.

Is Union Pacific Corporation (NYSE:UNP) undervalued? Money managers were becoming less confident. The number of bullish hedge fund bets were cut by 2 in recent months. Our calculations also showed that UNP 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). UNP was in 63 hedge funds’ portfolios at the end of March. There were 65 hedge funds in our database with UNP holdings at the end of the previous quarter.

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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 largest producers of bauxite to identify emerging trends that are likely to lead to 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 take a look at the key hedge fund action surrounding Union Pacific Corporation (NYSE:UNP).

What does smart money think about Union Pacific Corporation (NYSE:UNP)?

At the end of the first quarter, a total of 63 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards UNP over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Soroban Capital Partners, managed by Eric W. Mandelblatt and Gaurav Kapadia, holds the biggest position in Union Pacific Corporation (NYSE:UNP). Soroban Capital Partners has a $707.2 million position in the stock, comprising 13% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, led by Ken Fisher, holding a $528.4 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism contain John Armitage’s Egerton Capital Limited, Brandon Haley’s Holocene Advisors and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Soroban Capital Partners allocated the biggest weight to Union Pacific Corporation (NYSE:UNP), around 12.96% of its 13F portfolio. Skylands Capital is also relatively very bullish on the stock, earmarking 9.59 percent of its 13F equity portfolio to UNP.

Because Union Pacific Corporation (NYSE:UNP) has experienced a decline in interest from hedge fund managers, we can see that there was a specific group of fund managers that slashed their positions entirely heading into Q4. Interestingly, Lone Pine Capital cut the largest position of the “upper crust” of funds followed by Insider Monkey, valued at about $584 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund sold off about $117.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Union Pacific Corporation (NYSE:UNP). These stocks are Tesla Inc. (NASDAQ:TSLA), Danaher Corporation (NYSE:DHR), American Tower Corporation (NYSE:AMT), and TOTAL S.A. (NYSE:TOT). This group of stocks’ market caps are closest to UNP’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.25 hedge funds with bullish positions and the average amount invested in these stocks was $2494 million. That figure was $3443 million in UNP’s case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand TOTAL S.A. (NYSE:TOT) is the least popular one with only 12 bullish hedge fund positions. Union Pacific Corporation (NYSE:UNP) 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately UNP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on UNP were disappointed as the stock returned 19.1% 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.

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