Were These Hedge Funds Wrong About Dumping United Parcel Service, Inc. (UPS?

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 United Parcel Service, Inc. (NYSE:UPS).

United Parcel Service, Inc. (NYSE:UPS) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 48. UPS has seen a decrease in support from the world’s most elite money managers lately. There were 48 hedge funds in our database with UPS positions at the end of the first quarter. Our calculations also showed that UPS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the latest hedge fund action encompassing United Parcel Service, Inc. (NYSE:UPS).

What does smart money think about United Parcel Service, Inc. (NYSE:UPS)?

At the end of June, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards UPS over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Bill & Melinda Gates Foundation Trust held the most valuable stake in United Parcel Service, Inc. (NYSE:UPS), which was worth $503.1 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $169.5 million worth of shares. Two Sigma Advisors, PEAK6 Capital Management, and Adage Capital Management 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 Bill & Melinda Gates Foundation Trust allocated the biggest weight to United Parcel Service, Inc. (NYSE:UPS), around 2.82% of its 13F portfolio. Harvey Partners is also relatively very bullish on the stock, earmarking 2.01 percent of its 13F equity portfolio to UPS.

Judging by the fact that United Parcel Service, Inc. (NYSE:UPS) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there were a few hedgies who were dropping their positions entirely in the second quarter. It’s worth mentioning that Robert Pohly’s Samlyn Capital cut the largest stake of all the hedgies followed by Insider Monkey, comprising an estimated $31.3 million in stock, and Alexander Mitchell’s Scopus Asset Management was right behind this move, as the fund dropped about $30.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 11 funds in the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as United Parcel Service, Inc. (NYSE:UPS) but similarly valued. We will take a look at Anheuser-Busch InBev SA/NV (NYSE:BUD), HSBC Holdings plc (NYSE:HSBC), JD.Com Inc (NASDAQ:JD), Raytheon Technologies Corp (NYSE:RTX), 3M Company (NYSE:MMM), British American Tobacco plc (NYSE:BTI), and Starbucks Corporation (NASDAQ:SBUX). All of these stocks’ market caps are closest to UPS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $2851 million. That figure was $782 million in UPS’s case. JD.Com Inc (NASDAQ:JD) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 10 bullish hedge fund positions. United Parcel Service, Inc. (NYSE:UPS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for UPS is 34.7. 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. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on UPS as the stock returned 42.2% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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