How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Linde plc (NYSE:LIN) and determine whether hedge funds had an edge regarding this stock.
Is Linde plc (NYSE:LIN) the right investment to pursue these days? The best stock pickers were taking a bearish view. The number of long hedge fund bets decreased by 1 in recent months. Linde plc (NYSE:LIN) was in 52 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 53. Our calculations also showed that LIN 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 LIN positions at the end of the first quarter.
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by 58 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.
John Armitage Egerton Capital
John Armitage of Egerton Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's take a look at the new hedge fund action surrounding Linde plc (NYSE:LIN).
Hedge fund activity in Linde plc (NYSE:LIN)
Heading into the third quarter of 2020, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the previous quarter. By comparison, 41 hedge funds held shares or bullish call options in LIN 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.
More specifically, Ako Capital was the largest shareholder of Linde plc (NYSE:LIN), with a stake worth $877.4 million reported as of the end of September. Trailing Ako Capital was Egerton Capital Limited, which amassed a stake valued at $596.2 million. Impax Asset Management, Polaris Capital Management, and Diamond Hill 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 Ako Capital allocated the biggest weight to Linde plc (NYSE:LIN), around 15.32% of its 13F portfolio. VGI Partners is also relatively very bullish on the stock, dishing out 13.95 percent of its 13F equity portfolio to LIN.
Because Linde plc (NYSE:LIN) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few fund managers who were dropping their entire stakes last quarter. Intriguingly, Daniel Sundheim's D1 Capital Partners sold off the largest investment of the 750 funds tracked by Insider Monkey, totaling about $266 million in stock. Steve Cohen's fund, Point72 Asset Management, also sold off its stock, about $23.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to Linde plc (NYSE:LIN). These stocks are Philip Morris International Inc. (NYSE:PM), International Business Machines Corp. (NYSE:IBM), Citigroup Inc. (NYSE:C), Charter Communications, Inc. (NASDAQ:CHTR), Wells Fargo & Company (NYSE:WFC), BHP Group (NYSE:BBL), and The Boeing Company (NYSE:BA). All of these stocks' market caps match LIN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PM,53,2574980,5 IBM,46,918051,5 C,96,6229205,10 CHTR,96,11227561,-8 WFC,86,10344809,10 BBL,22,919411,1 BA,39,1280437,-15 Average,62.6,4784922,1.1 [/table]
As you can see these stocks had an average of 62.6 hedge funds with bullish positions and the average amount invested in these stocks was $4785 million. That figure was $3643 million in LIN's case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand BHP Group (NYSE:BBL) is the least popular one with only 22 bullish hedge fund positions. Linde plc (NYSE:LIN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LIN is 53.7. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on LIN, though not to the same extent, as the stock returned 17.7% during the first two months of Q3 and outperformed the market.
