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Hedge Funds Are Dumping XPO Logistics Inc (NYSE:XPO)

Abigail Fisher

We can judge whether XPO Logistics Inc (NYSE:XPO) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

XPO Logistics Inc (NYSE:XPO) investors should pay attention to a decrease in enthusiasm from smart money recently. Our calculations also showed that XPO 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_746830" align="aligncenter" width="473"] Matthew Hulsizer of PEAK6 Capital[/caption]

Matthew Hulsizer PEAK6 Capital

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. We're going to take a peek at the fresh hedge fund action encompassing XPO Logistics Inc (NYSE:XPO).

How have hedgies been trading XPO Logistics Inc (NYSE:XPO)?

At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the second quarter of 2019. On the other hand, there were a total of 44 hedge funds with a bullish position in XPO a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Orbis Investment Management held the most valuable stake in XPO Logistics Inc (NYSE:XPO), which was worth $1485.7 million at the end of the third quarter. On the second spot was Spruce House Investment Management which amassed $912.5 million worth of shares. Lyrical Asset Management, MFN Partners, and Black-and-White Capital 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 Spruce House Investment Management allocated the biggest weight to XPO Logistics Inc (NYSE:XPO), around 33.01% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, designating 10.97 percent of its 13F equity portfolio to XPO.

Judging by the fact that XPO Logistics Inc (NYSE:XPO) has experienced falling interest from the smart money, we can see that there is a sect of money managers who were dropping their full holdings in the third quarter. Interestingly, Seth Klarman's Baupost Group said goodbye to the biggest investment of the 750 funds monitored by Insider Monkey, valued at about $86.7 million in stock, and Jeffrey Ubben's ValueAct Capital was right behind this move, as the fund sold off about $57.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds in the third quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as XPO Logistics Inc (NYSE:XPO) but similarly valued. We will take a look at Dunkin Brands Group Inc (NASDAQ:DNKN), GCI Liberty, Inc. (NASDAQ:GLIBA), Columbia Sportswear Company (NASDAQ:COLM), and Alliance Data Systems Corporation (NYSE:ADS). This group of stocks' market caps are similar to XPO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DNKN,24,193861,1 GLIBA,34,2003406,-4 COLM,26,155276,-1 ADS,35,1242255,1 Average,29.75,898700,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $899 million. That figure was $2709 million in XPO's case. Alliance Data Systems Corporation (NYSE:ADS) is the most popular stock in this table. On the other hand Dunkin Brands Group Inc (NASDAQ:DNKN) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks XPO Logistics Inc (NYSE:XPO) is even less popular than DNKN. Hedge funds clearly dropped the ball on XPO as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on XPO as the stock returned 15.5% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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