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

Reymerlyn Martin
·6 min read

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Delta Air Lines, Inc. (NYSE:DAL).

Is Delta Air Lines, Inc. (NYSE:DAL) a bargain? The smart money was reducing their bets on the stock. The number of long hedge fund positions were cut by 14 in recent months. Delta Air Lines, Inc. (NYSE:DAL) was in 39 hedge funds' portfolios at the end of June. The all time high for this statistics is 109. Our calculations also showed that DAL 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.

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.

DUQUESNE CAPITAL
DUQUESNE CAPITAL

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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 review the latest hedge fund action regarding Delta Air Lines, Inc. (NYSE:DAL).

How have hedgies been trading Delta Air Lines, Inc. (NYSE:DAL)?

Heading into the third quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -26% from the first quarter of 2020. On the other hand, there were a total of 70 hedge funds with a bullish position in DAL a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Delta Air Lines, Inc. (NYSE:DAL) was held by Lansdowne Partners, which reported holding $242.4 million worth of stock at the end of June. It was followed by Citadel Investment Group with a $149.4 million position. Other investors bullish on the company included PAR Capital Management, Two Sigma Advisors, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Covalent Capital Partners allocated the biggest weight to Delta Air Lines, Inc. (NYSE:DAL), around 11.48% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, earmarking 10.13 percent of its 13F equity portfolio to DAL.

Because Delta Air Lines, Inc. (NYSE:DAL) has witnessed a decline in interest from the aggregate hedge fund industry, it's safe to say that there was a specific group of hedgies that decided to sell off their positions entirely in the second quarter. Intriguingly, Warren Buffett's Berkshire Hathaway dropped the largest position of the "upper crust" of funds monitored by Insider Monkey, valued at about $2050.9 million in stock. Richard Chilton's fund, Chilton Investment Company, also dropped its stock, about $36.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 14 funds in the second quarter.

Let's also examine hedge fund activity in other stocks similar to Delta Air Lines, Inc. (NYSE:DAL). These stocks are Fortis Inc. (NYSE:FTS), PG&E Corporation (NYSE:PCG), Slack Technologies Inc (NYSE:WORK), Akamai Technologies, Inc. (NASDAQ:AKAM), Ameren Corporation (NYSE:AEE), Interactive Brokers Group, Inc. (NASDAQ:IBKR), and Coca-Cola European Partners plc (NYSE:CCEP). This group of stocks' market values match DAL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FTS,8,379313,-7 PCG,92,4871702,44 WORK,32,287493,1 AKAM,40,548791,0 AEE,19,474360,-2 IBKR,32,695740,10 CCEP,27,464657,5 Average,35.7,1103151,7.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.7 hedge funds with bullish positions and the average amount invested in these stocks was $1103 million. That figure was $865 million in DAL's case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 8 bullish hedge fund positions. Delta Air Lines, Inc. (NYSE:DAL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DAL is 20.2. 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. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on DAL, though not to the same extent, as the stock returned 9.2% since Q2 (through October 30th) and outperformed the market as well.

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

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