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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Plains GP Holdings LP (NYSE:PAGP) and determine whether hedge funds had an edge regarding this stock.
Plains GP Holdings LP (NYSE:PAGP) has experienced a decrease in hedge fund sentiment in recent months. Plains GP Holdings LP (NYSE:PAGP) was in 19 hedge funds' portfolios at the end of June. The all time high for this statistics is 27. There were 22 hedge funds in our database with PAGP positions at the end of the first quarter. Our calculations also showed that PAGP 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.
To most shareholders, hedge funds are seen as unimportant, old investment vehicles of the past. While there are more than 8000 funds with their doors open today, We choose to focus on the leaders of this group, around 850 funds. Most estimates calculate that this group of people direct the lion's share of all hedge funds' total capital, and by monitoring their inimitable stock picks, Insider Monkey has unearthed various investment strategies that have historically beaten Mr. Market. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. With all of this in mind let's review the fresh hedge fund action regarding Plains GP Holdings LP (NYSE:PAGP).
How are hedge funds trading Plains GP Holdings LP (NYSE:PAGP)?
At the end of the second quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in PAGP over the last 20 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Plains GP Holdings LP (NYSE:PAGP) was held by D E Shaw, which reported holding $38.6 million worth of stock at the end of September. It was followed by Millennium Management with a $21.4 million position. Other investors bullish on the company included Alyeska Investment Group, Arrowstreet Capital, and Prescott Group Capital Management. In terms of the portfolio weights assigned to each position Yaupon Capital allocated the biggest weight to Plains GP Holdings LP (NYSE:PAGP), around 2.66% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, designating 2.36 percent of its 13F equity portfolio to PAGP.
Since Plains GP Holdings LP (NYSE:PAGP) has witnessed bearish sentiment from hedge fund managers, it's easy to see that there was a specific group of money managers that slashed their full holdings last quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP dumped the biggest position of all the hedgies tracked by Insider Monkey, worth an estimated $5.5 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Plains GP Holdings LP (NYSE:PAGP). We will take a look at Ameris Bancorp (NASDAQ:ABCB), Innovative Industrial Properties, Inc. (NYSE:IIPR), Hub Group Inc (NASDAQ:HUBG), SkyWest, Inc. (NASDAQ:SKYW), TransAlta Corporation (NYSE:TAC), Commscope Holding Company Inc (NASDAQ:COMM), and World Fuel Services Corporation (NYSE:INT). This group of stocks' market caps resemble PAGP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ABCB,17,82148,4 IIPR,20,185487,6 HUBG,21,199671,4 SKYW,16,83235,-2 TAC,12,51703,-3 COMM,32,416743,6 INT,18,82939,5 Average,19.4,157418,2.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.4 hedge funds with bullish positions and the average amount invested in these stocks was $157 million. That figure was $110 million in PAGP's case. Commscope Holding Company Inc (NASDAQ:COMM) is the most popular stock in this table. On the other hand TransAlta Corporation (NYSE:TAC) is the least popular one with only 12 bullish hedge fund positions. Plains GP Holdings LP (NYSE:PAGP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PAGP is 40.6. 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 negative signal and 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately PAGP wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PAGP investors were disappointed as the stock returned -30.1% in the third 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.