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BP plc (BP): Are Hedge Funds Right About This Stock?

Nina Todic

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like BP plc (NYSE:BP).

BP plc (NYSE:BP) investors should pay attention to an increase in enthusiasm from smart money of late. BP was in 36 hedge funds' portfolios at the end of September. There were 29 hedge funds in our database with BP positions at the end of the previous quarter. Our calculations also showed that BP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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_26357" align="aligncenter" width="359"] Ken Fisher of Fisher Asset Management[/caption]

FISHER ASSET MANAGEMENT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the latest hedge fund action regarding BP plc (NYSE:BP).

What does smart money think about BP plc (NYSE:BP)?

At Q3's end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BP over the last 17 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

No of Hedge Funds with BP Positions

Among these funds, Renaissance Technologies held the most valuable stake in BP plc (NYSE:BP), which was worth $676.2 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $344.6 million worth of shares. Orbis Investment Management, Millennium Management, and Kahn Brothers 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 Kahn Brothers allocated the biggest weight to BP plc (NYSE:BP), around 7.98% of its portfolio. Unio Capital is also relatively very bullish on the stock, dishing out 5.26 percent of its 13F equity portfolio to BP.

As industrywide interest jumped, key money managers were leading the bulls' herd. Arosa Capital Management, managed by Till Bechtolsheimer, assembled the largest position in BP plc (NYSE:BP). Arosa Capital Management had $14.6 million invested in the company at the end of the quarter. George Soros's Soros Fund Management also initiated a $10.3 million position during the quarter. The other funds with new positions in the stock are Sara Nainzadeh's Centenus Global Management, Paul Marshall and Ian Wace's Marshall Wace, and Matthew Tewksbury's Stevens Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as BP plc (NYSE:BP) but similarly valued. These stocks are International Business Machines Corporation (NYSE:IBM), Costco Wholesale Corporation (NASDAQ:COST), BHP Group (NYSE:BHP), and Accenture Plc (NYSE:ACN). This group of stocks' market caps resemble BP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IBM,42,1569607,-3 COST,51,3861914,11 BHP,21,800372,2 ACN,42,1120846,4 Average,39,1838185,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1838 million. That figure was $1617 million in BP's case. Costco Wholesale Corporation (NASDAQ:COST) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 21 bullish hedge fund positions. BP plc (NYSE:BP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BP investors were disappointed as the stock returned 0.1% during the first two months of the fourth quarter and underperformed 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 70 percent of these stocks already outperformed the market in Q4.

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

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