Did Hedge Funds Make The Right Call On Pinnacle West Capital Corporation (PNW) ?

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 Pinnacle West Capital Corporation (NYSE:PNW) and determine whether hedge funds skillfully traded this stock.

Hedge fund interest in Pinnacle West Capital Corporation (NYSE:PNW) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Cheniere Energy, Inc. (NYSE:LNG), Molina Healthcare, Inc. (NYSE:MOH), and Avery Dennison Corporation (NYSE:AVY) to gather more data points. Our calculations also showed that PNW 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.

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. 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.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now let’s take a peek at the recent hedge fund action encompassing Pinnacle West Capital Corporation (NYSE:PNW).

What does smart money think about Pinnacle West Capital Corporation (NYSE:PNW)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. By comparison, 24 hedge funds held shares or bullish call options in PNW a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Pinnacle West Capital Corporation (NYSE:PNW) was held by Renaissance Technologies, which reported holding $246.5 million worth of stock at the end of September. It was followed by AQR Capital Management with a $202.1 million position. Other investors bullish on the company included Zimmer Partners, Citadel Investment Group, and Electron Capital Partners. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Pinnacle West Capital Corporation (NYSE:PNW), around 10.06% of its 13F portfolio. Blackstart Capital is also relatively very bullish on the stock, earmarking 6.75 percent of its 13F equity portfolio to PNW.

Judging by the fact that Pinnacle West Capital Corporation (NYSE:PNW) has witnessed falling interest from the aggregate hedge fund industry, we can see that there were a few hedgies who were dropping their positions entirely last quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest investment of all the hedgies tracked by Insider Monkey, totaling about $1.4 million in stock. Jinghua Yan’s fund, TwinBeech Capital, also dropped its stock, about $0.8 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Pinnacle West Capital Corporation (NYSE:PNW). These stocks are Cheniere Energy, Inc. (NYSE:LNG), Molina Healthcare, Inc. (NYSE:MOH), Avery Dennison Corporation (NYSE:AVY), and Huazhu Group Limited (NASDAQ:HTHT). This group of stocks’ market values are closest to PNW’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $861 million. That figure was $923 million in PNW’s case. Cheniere Energy, Inc. (NYSE:LNG) is the most popular stock in this table. On the other hand Huazhu Group Limited (NASDAQ:HTHT) is the least popular one with only 17 bullish hedge fund positions. Pinnacle West Capital Corporation (NYSE:PNW) 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 PNW wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PNW investors were disappointed as the stock returned -2.3% 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.

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