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. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards National Grid plc (NYSE:NGG).
National Grid plc (NYSE:NGG) has experienced a decrease in hedge fund interest recently. Our calculations also showed that NGG 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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. Keeping this in mind let’s analyze the latest hedge fund action encompassing National Grid plc (NYSE:NGG).
Hedge fund activity in National Grid plc (NYSE:NGG)
At Q4’s end, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -40% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards NGG over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in National Grid plc (NYSE:NGG) was held by Renaissance Technologies, which reported holding $428.2 million worth of stock at the end of September. It was followed by Millennium Management with a $6.2 million position. Other investors bullish on the company included Arrowstreet Capital, Citadel Investment Group, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to National Grid plc (NYSE:NGG), around 0.33% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to NGG.
Since National Grid plc (NYSE:NGG) has faced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedgies who were dropping their positions entirely in the third quarter. Interestingly, Zilvinas Mecelis’s Covalis Capital cut the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $5.8 million in stock. D. E. Shaw’s fund, D E Shaw, also sold off its stock, about $5.5 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 4 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as National Grid plc (NYSE:NGG) but similarly valued. We will take a look at Sempra Energy (NYSE:SRE), Baxter International Inc. (NYSE:BAX), Lam Research Corporation (NASDAQ:LRCX), and The Progressive Corporation (NYSE:PGR). All of these stocks’ market caps are closest to NGG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SRE | 35 | 717221 | 4 |
| BAX | 47 | 3519863 | 8 |
| LRCX | 52 | 2625592 | 0 |
| PGR | 48 | 1782118 | -5 |
| Average | 45.5 | 2161199 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 45.5 hedge funds with bullish positions and the average amount invested in these stocks was $2161 million. That figure was $440 million in NGG’s case. Lam Research Corporation (NASDAQ:LRCX) is the most popular stock in this table. On the other hand Sempra Energy (NYSE:SRE) is the least popular one with only 35 bullish hedge fund positions. Compared to these stocks National Grid plc (NYSE:NGG) is even less popular than SRE. Hedge funds clearly dropped the ball on NGG as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 NGG as the stock returned -5.2% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
