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Were Hedge Funds Right About Southwest Airlines Co. (LUV)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. Keeping this in mind, let’s analyze whether Southwest Airlines Co. (NYSE:LUV) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Southwest Airlines Co. (NYSE:LUV) has seen an increase in support from the world’s most elite money managers in recent months. LUV was in 44 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 40 hedge funds in our database with LUV positions at the end of the previous quarter. Our calculations also showed that LUV 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).

In today’s marketplace there are a lot of signals stock market investors have at their disposal to grade stocks. A couple of the best signals are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the top money managers can outperform the market by a significant margin (see the details here).

Warren Buffett

Warren Buffett of Berkshire Hathaway

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the key hedge fund action surrounding Southwest Airlines Co. (NYSE:LUV).

What does smart money think about Southwest Airlines Co. (NYSE:LUV)?

At the end of the fourth quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards LUV over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Warren Buffett’s Berkshire Hathaway has the biggest position in Southwest Airlines Co. (NYSE:LUV), worth close to $2.896 billion, comprising 1.2% of its total 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, holding a $185.6 million position; 0.1% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that hold long positions comprise Cliff Asness’s AQR Capital Management, D. E. Shaw’s D E Shaw and Brandon Haley’s Holocene Advisors. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 4.09% of its 13F portfolio. Water Street Capital is also relatively very bullish on the stock, earmarking 3.3 percent of its 13F equity portfolio to LUV.

Consequently, some big names were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the biggest position in Southwest Airlines Co. (NYSE:LUV). Balyasny Asset Management had $9.3 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management also initiated a $5.5 million position during the quarter. The other funds with new positions in the stock are Matthew Tewksbury’s Stevens Capital Management, Paul Tudor Jones’s Tudor Investment Corp, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Southwest Airlines Co. (NYSE:LUV). We will take a look at Royal Caribbean Cruises Ltd. (NYSE:RCL), Cintas Corporation (NASDAQ:CTAS), Alcon Inc. (NYSE:ALC), and Motorola Solutions Inc (NYSE:MSI). This group of stocks’ market valuations match LUV’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RCL 43 1386244 -6
CTAS 45 820938 4
ALC 24 705505 0
MSI 41 560978 4
Average 38.25 868416 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.25 hedge funds with bullish positions and the average amount invested in these stocks was $868 million. That figure was $3650 million in LUV’s case. Cintas Corporation (NASDAQ:CTAS) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 24 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) 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 LUV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -45.6% 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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