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Hedge Funds Are Dumping Royal Dutch Shell plc (RDS)

Abigail Fisher

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Royal Dutch Shell plc (NYSE:RDS).

Royal Dutch Shell plc (NYSE:RDS) investors should pay attention to a decrease in hedge fund sentiment lately. RDS was in 29 hedge funds' portfolios at the end of September. There were 34 hedge funds in our database with RDS positions at the end of the previous quarter. Our calculations also showed that RDS 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

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.

[caption id="attachment_26335" align="aligncenter" width="480"] Ken Fisher of Fisher Asset Management[/caption]

Ken Fisher 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 take a gander at the recent hedge fund action regarding Royal Dutch Shell plc (NYSE:RDS).

Hedge fund activity in Royal Dutch Shell plc (NYSE:RDS)

At Q3's end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in RDS over the last 17 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

RDS_dec2019

The largest stake in Royal Dutch Shell plc (NYSE:RDS) was held by Fisher Asset Management, which reported holding $857.6 million worth of stock at the end of September. It was followed by Pzena Investment Management with a $182.6 million position. Other investors bullish on the company included Orbis Investment Management, Two Sigma Advisors, and Gabalex Capital. In terms of the portfolio weights assigned to each position Gabalex Capital allocated the biggest weight to Royal Dutch Shell plc (NYSE:RDS), around 9.29% of its portfolio. Arosa Capital Management is also relatively very bullish on the stock, setting aside 3.23 percent of its 13F equity portfolio to RDS.

Seeing as Royal Dutch Shell plc (NYSE:RDS) has witnessed declining sentiment from hedge fund managers, it's easy to see that there was a specific group of hedge funds who sold off their positions entirely by the end of the third quarter. Interestingly, Perella Weinberg Partners dumped the biggest investment of all the hedgies followed by Insider Monkey, comprising close to $8.7 million in stock. Ken Griffin's fund, Citadel Investment Group, also dropped its stock, about $4.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 5 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Royal Dutch Shell plc (NYSE:RDS) but similarly valued. These stocks are The Coca-Cola Company (NYSE:KO), Intel Corporation (NASDAQ:INTC), Chevron Corporation (NYSE:CVX), and Wells Fargo & Company (NYSE:WFC). This group of stocks' market caps are closest to RDS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KO,50,23639411,2 INTC,58,4800111,15 CVX,48,1775593,4 WFC,62,25231139,-3 Average,54.5,13861564,4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 54.5 hedge funds with bullish positions and the average amount invested in these stocks was $13862 million. That figure was $1386 million in RDS's case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand Chevron Corporation (NYSE:CVX) is the least popular one with only 48 bullish hedge fund positions. Compared to these stocks Royal Dutch Shell plc (NYSE:RDS) is even less popular than CVX. Hedge funds dodged a bullet by taking a bearish stance towards RDS. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately RDS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); RDS investors were disappointed as the stock returned -0.8% during the fourth quarter (through the end of November) 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 so far in Q4.

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

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