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 Duke Energy Corporation (NYSE:DUK) and determine whether hedge funds had an edge regarding this stock.
Duke Energy Corporation (NYSE:DUK) has experienced a decrease in enthusiasm from smart money of late. Our calculations also showed that DUK 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jonathan Barrett of Luminus Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s review the fresh hedge fund action regarding Duke Energy Corporation (NYSE:DUK).
How have hedgies been trading Duke Energy Corporation (NYSE:DUK)?
At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the fourth quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in DUK a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Renaissance Technologies has the biggest position in Duke Energy Corporation (NYSE:DUK), worth close to $572.5 million, amounting to 0.6% of its total 13F portfolio. The second largest stake is held by Ken Griffin of Citadel Investment Group, with a $301 million position; 0.1% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism comprise D. E. Shaw’s D E Shaw, John Overdeck and David Siegel’s Two Sigma Advisors and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Duke Energy Corporation (NYSE:DUK), around 15.49% of its 13F portfolio. Blackstart Capital is also relatively very bullish on the stock, earmarking 9.36 percent of its 13F equity portfolio to DUK.
Since Duke Energy Corporation (NYSE:DUK) has faced declining sentiment from the smart money, logic holds that there were a few hedgies that slashed their entire stakes by the end of the first quarter. Intriguingly, Greg Poole’s Echo Street Capital Management said goodbye to the largest stake of the “upper crust” of funds followed by Insider Monkey, worth about $28.7 million in stock. Noam Gottesman’s fund, GLG Partners, also cut its stock, about $19.6 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds by the end of the first quarter.
Let’s go over hedge fund activity in other stocks similar to Duke Energy Corporation (NYSE:DUK). We will take a look at JD.Com Inc (NASDAQ:JD), Automatic Data Processing, Inc. (NASDAQ:ADP), Enbridge Inc (NYSE:ENB), and Allergan plc (NYSE:AGN). This group of stocks’ market valuations are closest to DUK’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JD | 90 | 7919916 | 27 |
| ADP | 46 | 1444924 | -5 |
| ENB | 25 | 297504 | 4 |
| AGN | 95 | 12598171 | 9 |
| Average | 64 | 5565129 | 8.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 64 hedge funds with bullish positions and the average amount invested in these stocks was $5565 million. That figure was $1574 million in DUK’s case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 25 bullish hedge fund positions. Duke Energy Corporation (NYSE:DUK) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately DUK wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DUK investors were disappointed as the stock returned -0.1% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
