Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in American Electric Power Company, Inc. (NYSE:AEP)? The smart money sentiment can provide an answer to this question.
American Electric Power Company, Inc. (NYSE:AEP) was in 34 hedge funds’ portfolios at the end of December. AEP has experienced a decrease in support from the world’s most elite money managers recently. There were 35 hedge funds in our database with AEP positions at the end of the previous quarter. Our calculations also showed that AEP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 41 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.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now let’s take a peek at the fresh hedge fund action surrounding American Electric Power Company, Inc. (NYSE:AEP).
What does smart money think about American Electric Power Company, Inc. (NYSE:AEP)?
Heading into the first quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AEP over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of American Electric Power Company, Inc. (NYSE:AEP), with a stake worth $440.6 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $339.9 million. Millennium Management, AQR Capital Management, and D E Shaw 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 Blackstart Capital allocated the biggest weight to American Electric Power Company, Inc. (NYSE:AEP), around 6.53% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, designating 3.17 percent of its 13F equity portfolio to AEP.
Judging by the fact that American Electric Power Company, Inc. (NYSE:AEP) has experienced declining sentiment from the smart money, it’s easy to see that there lies a certain “tier” of funds that elected to cut their entire stakes by the end of the third quarter. It’s worth mentioning that Stuart J. Zimmer’s Zimmer Partners said goodbye to the biggest position of the “upper crust” of funds followed by Insider Monkey, valued at close to $61.9 million in stock, and Matthew Tewksbury’s Stevens Capital Management was right behind this move, as the fund cut about $6.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds by the end of the third quarter.
Let’s also examine hedge fund activity in other stocks similar to American Electric Power Company, Inc. (NYSE:AEP). These stocks are Emerson Electric Co. (NYSE:EMR), The Bank of New York Mellon Corporation (NYSE:BK), Shopify Inc (NYSE:SHOP), and Simon Property Group, Inc (NYSE:SPG). This group of stocks’ market caps are similar to AEP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EMR | 41 | 1165094 | 2 |
| BK | 58 | 6711257 | 3 |
| SHOP | 30 | 3075550 | -7 |
| SPG | 26 | 579726 | -3 |
| Average | 38.75 | 2882907 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.75 hedge funds with bullish positions and the average amount invested in these stocks was $2883 million. That figure was $1688 million in AEP’s case. The Bank of New York Mellon Corporation (NYSE:BK) is the most popular stock in this table. On the other hand Simon Property Group, Inc (NYSE:SPG) is the least popular one with only 26 bullish hedge fund positions. American Electric Power Company, Inc. (NYSE:AEP) is not the least popular stock in this group but hedge fund interest is still below average. 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 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on AEP as the stock returned -4.4% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
