Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Delta Air Lines, Inc. (NYSE:DAL) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.
Delta Air Lines, Inc. (NYSE:DAL) has seen a decrease in hedge fund interest recently. Our calculations also showed that DAL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_747408" align="aligncenter" width="473"] Paul Reeder of PAR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now let's take a look at the latest hedge fund action encompassing Delta Air Lines, Inc. (NYSE:DAL).
How have hedgies been trading Delta Air Lines, Inc. (NYSE:DAL)?
At the end of the third quarter, a total of 65 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DAL over the last 17 quarters. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
More specifically, Berkshire Hathaway was the largest shareholder of Delta Air Lines, Inc. (NYSE:DAL), with a stake worth $4084.4 million reported as of the end of September. Trailing Berkshire Hathaway was Lansdowne Partners, which amassed a stake valued at $778 million. PAR Capital Management, AQR Capital Management, and Two Sigma Advisors 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 Lansdowne Partners allocated the biggest weight to Delta Air Lines, Inc. (NYSE:DAL), around 20.7% of its 13F portfolio. Cyrus Capital Partners is also relatively very bullish on the stock, dishing out 15.73 percent of its 13F equity portfolio to DAL.
Since Delta Air Lines, Inc. (NYSE:DAL) has faced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of funds who were dropping their full holdings heading into Q4. Intriguingly, Steve Cohen's Point72 Asset Management cut the largest position of the 750 funds tracked by Insider Monkey, totaling close to $33.8 million in call options, and Ross Margolies's Stelliam Investment Management was right behind this move, as the fund said goodbye to about $33.2 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 5 funds heading into Q4.
Let's check out hedge fund activity in other stocks similar to Delta Air Lines, Inc. (NYSE:DAL). We will take a look at Roper Technologies, Inc. (NYSE:ROP), China Telecom Corporation Limited (NYSE:CHA), Welltower Inc. (NYSE:WELL), and Canadian Imperial Bank of Commerce (NYSE:CM). This group of stocks' market values resemble DAL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ROP,37,1044629,2 CHA,8,24410,1 WELL,15,364970,-2 CM,15,220104,3 Average,18.75,413528,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $414 million. That figure was $6997 million in DAL's case. Roper Technologies, Inc. (NYSE:ROP) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Delta Air Lines, Inc. (NYSE:DAL) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately DAL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DAL were disappointed as the stock returned 22.4% so far in 2019 (through 12/23) and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019. 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.