It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Edison International (NYSE:EIX) and compare its performance against hedge funds’ favorite stocks.
Is Edison International (NYSE:EIX) a healthy stock for your portfolio? Investors who are in the know are getting less optimistic. The number of long hedge fund bets went down by 6 lately. Our calculations also showed that EIX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Phill Gross of Adage Capital Management
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. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we’re going to go over the fresh hedge fund action surrounding Edison International (NYSE:EIX).
How are hedge funds trading Edison International (NYSE:EIX)?
At Q3’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 25 hedge funds with a bullish position in EIX a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, Pzena Investment Management was the largest shareholder of Edison International (NYSE:EIX), with a stake worth $429.1 million reported as of the end of September. Trailing Pzena Investment Management was Renaissance Technologies, which amassed a stake valued at $297.5 million. Zimmer Partners, Steadfast Capital Management, and Adage 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 Inherent Group allocated the biggest weight to Edison International (NYSE:EIX), around 23.15% of its 13F portfolio. Shelter Harbor Advisors is also relatively very bullish on the stock, designating 5.71 percent of its 13F equity portfolio to EIX.
Judging by the fact that Edison International (NYSE:EIX) has witnessed bearish sentiment from the smart money, logic holds that there exists a select few fund managers that decided to sell off their full holdings last quarter. Interestingly, Josh Donfeld and David Rogers’s Castle Hook Partners dumped the largest stake of all the hedgies tracked by Insider Monkey, totaling an estimated $79.3 million in stock, and Kevin D. Eng’s Columbus Hill Capital Management was right behind this move, as the fund dropped about $61.5 million worth. These moves are interesting, as total hedge fund interest fell by 6 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Edison International (NYSE:EIX). We will take a look at Dollar Tree, Inc. (NASDAQ:DLTR), T. Rowe Price Group, Inc. (NASDAQ:TROW), IHS Markit Ltd. (NYSE:INFO), and Hilton Worldwide Holdings Inc (NYSE:HLT). This group of stocks’ market valuations match EIX’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DLTR | 49 | 1912359 | 0 |
| TROW | 23 | 209393 | -7 |
| INFO | 30 | 859361 | 2 |
| HLT | 48 | 3928940 | 4 |
| Average | 37.5 | 1727513 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $1728 million. That figure was $1709 million in EIX’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand T. Rowe Price Group, Inc. (NASDAQ:TROW) is the least popular one with only 23 bullish hedge fund positions. Edison International (NYSE:EIX) 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. A small number of hedge funds were also right about betting on EIX, though not to the same extent, as the stock returned 37.6% in 2019 and surpassed the market.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
