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Was The Smart Money Right About Souring On Chevron Corporation (CVX)?

Abigail Fisher
·7 min read

In this article we are going to use hedge fund sentiment as a tool and determine whether Chevron Corporation (NYSE:CVX) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Chevron Corporation (NYSE:CVX) an outstanding investment now? The best stock pickers were selling. The number of bullish hedge fund bets fell by 3 recently. Chevron Corporation (NYSE:CVX) was in 50 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 56. Our calculations also showed that CVX 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). There were 53 hedge funds in our database with CVX holdings at the end of March. Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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.

Donald Sussman Paloma Partners
Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. Now let's check out the fresh hedge fund action surrounding Chevron Corporation (NYSE:CVX).

What does smart money think about Chevron Corporation (NYSE:CVX)?

Heading into the third quarter of 2020, a total of 50 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. On the other hand, there were a total of 44 hedge funds with a bullish position in CVX a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the biggest position in Chevron Corporation (NYSE:CVX). Fisher Asset Management has a $470.7 million position in the stock, comprising 0.5% of its 13F portfolio. The second most bullish fund manager is Ric Dillon of Diamond Hill Capital, with a $310.2 million position; the fund has 1.8% of its 13F portfolio invested in the stock. Other peers with similar optimism comprise Ken Griffin's Citadel Investment Group, Israel Englander's Millennium Management and Phill Gross and Robert Atchinson's Adage Capital Management. In terms of the portfolio weights assigned to each position International Value Advisers allocated the biggest weight to Chevron Corporation (NYSE:CVX), around 3.36% of its 13F portfolio. Stamos Capital is also relatively very bullish on the stock, dishing out 2.76 percent of its 13F equity portfolio to CVX.

Seeing as Chevron Corporation (NYSE:CVX) has faced declining sentiment from hedge fund managers, we can see that there was a specific group of money managers that elected to cut their positions entirely in the second quarter. At the top of the heap, Steve Cohen's Point72 Asset Management dropped the biggest position of all the hedgies followed by Insider Monkey, worth about $93.4 million in stock. Brandon Haley's fund, Holocene Advisors, also cut its stock, about $58.9 million worth. These transactions are interesting, as total hedge fund interest fell by 3 funds in the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Chevron Corporation (NYSE:CVX) but similarly valued. These stocks are Abbott Laboratories (NYSE:ABT), Eli Lilly and Company (NYSE:LLY), ASML Holding N.V. (NASDAQ:ASML), Novo Nordisk A/S (NYSE:NVO), NIKE, Inc. (NYSE:NKE), The Unilever Group (NYSE:UL), and Thermo Fisher Scientific Inc. (NYSE:TMO). This group of stocks' market valuations match CVX's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ABT,67,3504346,5 LLY,51,2161323,8 ASML,25,1961320,-5 NVO,24,3294368,0 NKE,71,2603242,-9 UL,13,149078,0 TMO,73,4525711,-7 Average,46.3,2599913,-1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.3 hedge funds with bullish positions and the average amount invested in these stocks was $2600 million. That figure was $1585 million in CVX's case. Thermo Fisher Scientific Inc. (NYSE:TMO) is the most popular stock in this table. On the other hand The Unilever Group (NYSE:UL) is the least popular one with only 13 bullish hedge fund positions. Chevron Corporation (NYSE:CVX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CVX is 59.6. 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 positive signal but 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately CVX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on CVX were disappointed as the stock returned -17.5% since the end of June (through 10/23) 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 many of these stocks already outperformed the market so far this year.

Get real-time email alerts: Follow Chevron Corp (NYSE:CVX)

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

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