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Were Hedge Funds Right About Dumping Delta Air Lines, Inc. (DAL) ?

Reymerlyn Martin

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Delta Air Lines, Inc. (NYSE:DAL) investors should be aware of a decrease in enthusiasm from smart money recently. Our calculations also showed that DAL isn't among the 30 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

GOTHAM ASSET MANAGEMENT

We're going to check out the recent hedge fund action surrounding Delta Air Lines, Inc. (NYSE:DAL).

What does the smart money think about Delta Air Lines, Inc. (NYSE:DAL)?

Heading into the second quarter of 2019, a total of 60 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DAL over the last 15 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

DAL_jun2019

The largest stake in Delta Air Lines, Inc. (NYSE:DAL) was held by Berkshire Hathaway, which reported holding $3662.5 million worth of stock at the end of March. It was followed by Lansdowne Partners with a $999.1 million position. Other investors bullish on the company included PAR Capital Management, Two Sigma Advisors, and Millennium Management.

Since Delta Air Lines, Inc. (NYSE:DAL) has faced declining sentiment from hedge fund managers, it's easy to see that there was a specific group of funds that slashed their positions entirely last quarter. Interestingly, Mike Masters's Masters Capital Management dumped the biggest position of all the hedgies monitored by Insider Monkey, worth an estimated $99.8 million in stock. Anand Parekh's fund, Alyeska Investment Group, also dropped its stock, about $52.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 13 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Delta Air Lines, Inc. (NYSE:DAL) but similarly valued. These stocks are Williams Companies, Inc. (NYSE:WMB), Activision Blizzard, Inc. (NASDAQ:ATVI), Fiserv, Inc. (NASDAQ:FISV), and Sempra Energy (NYSE:SRE). This group of stocks' market values are closest to DAL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WMB,32,1694369,-7 ATVI,50,2741166,-9 FISV,47,2541202,18 SRE,31,2901864,-3 Average,40,2469650,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $2470 million. That figure was $6467 million in DAL's case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Sempra Energy (NYSE:SRE) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Delta Air Lines, Inc. (NYSE:DAL) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on DAL as the stock returned 3.3% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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