Were Hedge Funds Right About Valero Energy Corporation (VLO)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Valero Energy Corporation (NYSE:VLO).

Is Valero Energy Corporation (NYSE:VLO) a cheap investment right now? Hedge funds were selling. The number of bullish hedge fund bets dropped by 3 in recent months. Valero Energy Corporation (NYSE:VLO) was in 38 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 56. Our calculations also showed that VLO isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let’s take a look at the recent hedge fund action encompassing Valero Energy Corporation (NYSE:VLO).

Do Hedge Funds Think VLO Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the first quarter of 2020. By comparison, 39 hedge funds held shares or bullish call options in VLO a year ago. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Elliott Investment Management, managed by Paul Singer, holds the number one position in Valero Energy Corporation (NYSE:VLO). Elliott Investment Management has a $156.2 million call position in the stock, comprising 1.2% of its 13F portfolio. On Elliott Investment Management’s heels is Ken Griffin of Citadel Investment Group, with a $61.9 million call position; less than 0.1%% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions comprise Ken Griffin’s Citadel Investment Group, Vince Maddi and Shawn Brennan’s SIR Capital Management and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Valero Energy Corporation (NYSE:VLO), around 5.24% of its 13F portfolio. Bourgeon Capital is also relatively very bullish on the stock, designating 2.53 percent of its 13F equity portfolio to VLO.

Seeing as Valero Energy Corporation (NYSE:VLO) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of hedge funds who were dropping their positions entirely by the end of the second quarter. Interestingly, Brandon Haley’s Holocene Advisors said goodbye to the largest investment of the 750 funds watched by Insider Monkey, valued at about $47.9 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund sold off about $34.1 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks similar to Valero Energy Corporation (NYSE:VLO). We will take a look at Liberty Broadband Corp (NASDAQ:LBRDA), BeiGene, Ltd. (NASDAQ:BGNE), Skyworks Solutions Inc (NASDAQ:SWKS), Li Auto Inc. (NASDAQ:LI), Chunghwa Telecom Co., Ltd (NYSE:CHT), Southwest Airlines Co. (NYSE:LUV), and Carnival Corporation & plc (NYSE:CCL). This group of stocks’ market valuations are closest to VLO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.6 hedge funds with bullish positions and the average amount invested in these stocks was $1432 million. That figure was $259 million in VLO’s case. Southwest Airlines Co. (NYSE:LUV) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 7 bullish hedge fund positions. Valero Energy Corporation (NYSE:VLO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VLO is 59.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately VLO wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on VLO were disappointed as the stock returned 1.2% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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