Did Hedge Funds Make The Right Call On The Southern Company (SO) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtThe Southern Company (NYSE:SO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

The Southern Company (NYSE:SO) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. SO was in 33 hedge funds’ portfolios at the end of the first quarter of 2020. There were 30 hedge funds in our database with SO positions at the end of the previous quarter. Our calculations also showed that SO 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.

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 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.

Stuart Zimmer of Zimmer Partners

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 we’re going to take a glance at the recent hedge fund action surrounding The Southern Company (NYSE:SO).

Hedge fund activity in The Southern Company (NYSE:SO)

At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SO over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in The Southern Company (NYSE:SO), which was worth $412.1 million at the end of the third quarter. On the second spot was D E Shaw which amassed $71 million worth of shares. Zimmer Partners, Adage Capital Management, and AQR Capital Management 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 Horseman Capital Management allocated the biggest weight to The Southern Company (NYSE:SO), around 1.79% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, dishing out 1.48 percent of its 13F equity portfolio to SO.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the largest position in The Southern Company (NYSE:SO). Adage Capital Management had $65.1 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $5.6 million position during the quarter. The other funds with brand new SO positions are Franklin Parlamis’s Aequim Alternative Investments, Alec Litowitz and Ross Laser’s Magnetar Capital, and Israel Englander’s Millennium Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Southern Company (NYSE:SO) but similarly valued. These stocks are Colgate-Palmolive Company (NYSE:CL), Rio Tinto Group (NYSE:RIO), Zoetis Inc (NYSE:ZTS), and Canadian National Railway Company (NYSE:CNI). All of these stocks’ market caps are closest to SO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.75 hedge funds with bullish positions and the average amount invested in these stocks was $1589 million. That figure was $810 million in SO’s case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 20 bullish hedge fund positions. The Southern Company (NYSE:SO) 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 SO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SO investors were disappointed as the stock returned -3.1% 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.

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