Is Union Pacific (UNP) A Good Stock To Buy Now?

Abigail Fisher
·7 min read

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Union Pacific Corporation (NYSE:UNP).

Is Union Pacific Corporation (NYSE:UNP) a good stock to buy now? UNP was in 74 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 69. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. UNP investors should be aware of an increase in support from the world's most elite money managers recently. There were 68 hedge funds in our database with UNP positions at the end of the second quarter. 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 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 66 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.

Eric Mandelblatt Soroban Capital Partners
Eric Mandelblatt Soroban Capital Partners

Eric Mandelblatt of Soroban Capital Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Now we're going to analyze the recent hedge fund action encompassing Union Pacific Corporation (NYSE:UNP).

How have hedgies been trading Union Pacific Corporation (NYSE:UNP)?

At the end of September, a total of 74 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the previous quarter. By comparison, 69 hedge funds held shares or bullish call options in UNP a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

The largest stake in Union Pacific Corporation (NYSE:UNP) was held by Fisher Asset Management, which reported holding $816.3 million worth of stock at the end of September. It was followed by Soroban Capital Partners with a $658.3 million position. Other investors bullish on the company included Egerton Capital Limited, D E Shaw, and Suvretta Capital Management. In terms of the portfolio weights assigned to each position Skylands Capital allocated the biggest weight to Union Pacific Corporation (NYSE:UNP), around 8.81% of its 13F portfolio. Soroban Capital Partners is also relatively very bullish on the stock, dishing out 6.63 percent of its 13F equity portfolio to UNP.

As aggregate interest increased, key money managers have been driving this bullishness. OZ Management, managed by Daniel S. Och, created the most outsized position in Union Pacific Corporation (NYSE:UNP). OZ Management had $107.5 million invested in the company at the end of the quarter. Alexander Mitchell's Scopus Asset Management also initiated a $72.8 million position during the quarter. The other funds with brand new UNP positions are Jack Woodruff's Candlestick Capital Management, David Costen Haley's HBK Investments, and Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Union Pacific Corporation (NYSE:UNP) but similarly valued. We will take a look at QUALCOMM, Incorporated (NASDAQ:QCOM), China Mobile Limited (NYSE:CHL), Texas Instruments Incorporated (NASDAQ:TXN), BHP Group (NYSE:BHP), Charter Communications, Inc. (NASDAQ:CHTR), Sanofi (NASDAQ:SNY), and Lowe's Companies, Inc. (NYSE:LOW). This group of stocks' market values are closest to UNP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position QCOM,87,2581329,13 CHL,10,400662,1 TXN,55,2079422,0 BHP,18,710662,2 CHTR,88,11998879,-8 SNY,20,1244537,-4 LOW,83,6564097,-6 Average,51.6,3654227,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.6 hedge funds with bullish positions and the average amount invested in these stocks was $3654 million. That figure was $3917 million in UNP's case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 10 bullish hedge fund positions. Union Pacific Corporation (NYSE:UNP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for UNP is 81. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and beat the market again by 16.1 percentage points. Unfortunately UNP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on UNP were disappointed as the stock returned 4.9% since the end of September (through 11/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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