Union Pacific Corporation (UNP) vs. Hedge Fund Favorites in 2019

Asma UL Husna

Sun, Dec 29, 2019, 10:10 AM

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Union Pacific Corporation (NYSE:UNP).

Is Union Pacific Corporation (NYSE:UNP) a bargain? Hedge funds are in a bearish mood. The number of long hedge fund positions dropped by 2 in recent months. Our calculations also showed that UNP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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_670753" align="aligncenter" width="473"]

John Armitage of Egerton Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to take a glance at the key hedge fund action encompassing Union Pacific Corporation (NYSE:UNP).

How are hedge funds trading Union Pacific Corporation (NYSE:UNP)?

At Q3's end, a total of 62 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the previous quarter. By comparison, 53 hedge funds held shares or bullish call options in UNP a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Egerton Capital Limited held the most valuable stake in Union Pacific Corporation (NYSE:UNP), which was worth $1111.8 million at the end of the third quarter. On the second spot was Soroban Capital Partners which amassed $832.3 million worth of shares. Lone Pine Capital, Arrowstreet Capital, and Fisher Asset Management 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 Soroban Capital Partners allocated the biggest weight to Union Pacific Corporation (NYSE:UNP), around 11.71% of its 13F portfolio. Skylands Capital is also relatively very bullish on the stock, designating 8.99 percent of its 13F equity portfolio to UNP.

Judging by the fact that Union Pacific Corporation (NYSE:UNP) has experienced a decline in interest from the smart money, logic holds that there exists a select few hedge funds who sold off their full holdings by the end of the third quarter. Intriguingly, Andrew Immerman and Jeremy Schiffman's Palestra Capital Management dropped the largest position of all the hedgies tracked by Insider Monkey, comprising about $178.9 million in stock, and Robert Boucai's Newbrook Capital Advisors was right behind this move, as the fund dropped about $26.6 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Union Pacific Corporation (NYSE:UNP) but similarly valued. These stocks are NextEra Energy, Inc. (NYSE:NEE), AbbVie Inc (NYSE:ABBV), Lockheed Martin Corporation (NYSE:LMT), and Broadcom Inc (NASDAQ:AVGO). This group of stocks' market values match UNP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEE,41,1505214,1 ABBV,61,4434502,6 LMT,46,1782982,-2 AVGO,54,2515014,1 Average,50.5,2559428,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.5 hedge funds with bullish positions and the average amount invested in these stocks was $2559 million. That figure was $5198 million in UNP's case. AbbVie Inc (NYSE:ABBV) is the most popular stock in this table. On the other hand NextEra Energy, Inc. (NYSE:NEE) is the least popular one with only 41 bullish hedge fund positions. Compared to these stocks Union Pacific Corporation (NYSE:UNP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on UNP, though not to the same extent, as the stock returned 32.7% during the same period and outperformed the market as well.