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Did Hedge Funds Make The Right Call On XPO Logistics Inc (XPO) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards XPO Logistics Inc (NYSE:XPO) and determine whether hedge funds skillfully traded this stock.

XPO Logistics Inc (NYSE:XPO) investors should pay attention to an increase in hedge fund interest recently. Our calculations also showed that XPO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Richard Driehaus of Driehaus Capital

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 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. With all of this in mind we’re going to take a glance at the key hedge fund action encompassing XPO Logistics Inc (NYSE:XPO).

How are hedge funds trading XPO Logistics Inc (NYSE:XPO)?

Heading into the second quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in XPO over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is XPO A Good Stock To Buy?

More specifically, Orbis Investment Management was the largest shareholder of XPO Logistics Inc (NYSE:XPO), with a stake worth $870.4 million reported as of the end of September. Trailing Orbis Investment Management was Spruce House Investment Management, which amassed a stake valued at $432.3 million. Lyrical Asset Management, MFN Partners, and Citadel Investment Group 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 Spruce House Investment Management allocated the biggest weight to XPO Logistics Inc (NYSE:XPO), around 27.3% of its 13F portfolio. MFN Partners is also relatively very bullish on the stock, dishing out 14.18 percent of its 13F equity portfolio to XPO.

As industrywide interest jumped, key hedge funds have jumped into XPO Logistics Inc (NYSE:XPO) headfirst. Baupost Group, managed by Seth Klarman, initiated the largest position in XPO Logistics Inc (NYSE:XPO). Baupost Group had $41.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $10.3 million position during the quarter. The other funds with new positions in the stock are Marc Majzner’s Clearline Capital, D. E. Shaw’s D E Shaw, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as XPO Logistics Inc (NYSE:XPO) but similarly valued. These stocks are FTI Consulting, Inc. (NYSE:FCN), Santander Consumer USA Holdings Inc (NYSE:SC), Nielsen Holdings plc (NYSE:NLSN), and MKS Instruments, Inc. (NASDAQ:MKSI). This group of stocks’ market caps are closest to XPO’s market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FCN,19,175190,-2 SC,20,423643,-7 NLSN,33,762761,4 MKSI,27,296258,-1 Average,24.75,414463,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $414 million. That figure was $1720 million in XPO’s case. Nielsen Holdings plc (NYSE:NLSN) is the most popular stock in this table. On the other hand FTI Consulting, Inc. (NYSE:FCN) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks XPO Logistics Inc (NYSE:XPO) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on XPO as the stock returned 58.5% in Q2 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.

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

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