Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards NRG Energy Inc (NYSE:NRG).
Is NRG Energy Inc (NYSE:NRG) a buy right now? The smart money was selling. The number of bullish hedge fund positions dropped by 2 in recent months. NRG Energy Inc (NYSE:NRG) was in 33 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 50. Our calculations also showed that NRG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 35 hedge funds in our database with NRG holdings at the end of March.
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 79 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.
Richard S. Pzena of Pzena Investment Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Now we’re going to analyze the key hedge fund action surrounding NRG Energy Inc (NYSE:NRG).
Do Hedge Funds Think NRG Is A Good Stock To Buy Now?
At the end of June, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in NRG over the last 24 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in NRG Energy Inc (NYSE:NRG) was held by Pzena Investment Management, which reported holding $573.1 million worth of stock at the end of June. It was followed by Permian Investment Partners with a $306.6 million position. Other investors bullish on the company included Steadfast Capital Management, BlueCrest Capital Mgmt., and Lyrical Asset Management. In terms of the portfolio weights assigned to each position Permian Investment Partners allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 31.73% of its 13F portfolio. Permian Investment Partners is also relatively very bullish on the stock, setting aside 8.73 percent of its 13F equity portfolio to NRG.
Since NRG Energy Inc (NYSE:NRG) has witnessed a decline in interest from hedge fund managers, we can see that there exists a select few fund managers who sold off their full holdings by the end of the second quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest position of the 750 funds monitored by Insider Monkey, comprising close to $43.1 million in stock, and Martin D. Sass’s MD Sass was right behind this move, as the fund sold off about $31 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds by the end of the second quarter.
Let’s now review hedge fund activity in other stocks similar to NRG Energy Inc (NYSE:NRG). These stocks are MKS Instruments, Inc. (NASDAQ:MKSI), AGCO Corporation (NYSE:AGCO), Globe Life Inc. (NYSE:GL), Playtika Holding Corp. (NASDAQ:PLTK), Appian Corporation (NASDAQ:APPN), Sasol Limited (NYSE:SSL), and UGI Corp (NYSE:UGI). All of these stocks’ market caps match NRG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MKSI | 26 | 423293 | 4 |
| AGCO | 38 | 429223 | 2 |
| GL | 28 | 795034 | -5 |
| PLTK | 26 | 463637 | 5 |
| APPN | 13 | 879312 | -11 |
| SSL | 5 | 63156 | -2 |
| UGI | 23 | 275405 | 4 |
| Average | 22.7 | 475580 | -0.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.7 hedge funds with bullish positions and the average amount invested in these stocks was $476 million. That figure was $1905 million in NRG’s case. AGCO Corporation (NYSE:AGCO) is the most popular stock in this table. On the other hand Sasol Limited (NYSE:SSL) is the least popular one with only 5 bullish hedge fund positions. NRG Energy Inc (NYSE:NRG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NRG is 65.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Hedge funds were also right about betting on NRG as the stock returned 3.1% since the end of Q2 (through 10/15) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Nrg Energy Inc. (NYSE:NRG)
Follow Nrg Energy Inc. (NYSE:NRG)
Suggested Articles:
Disclosure: None. This article was originally published at Insider Monkey.
