Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like FirstEnergy Corp. (NYSE:FE).
Is FirstEnergy Corp. (NYSE:FE) a buy right now? Money managers are getting less bullish. The number of bullish hedge fund positions fell by 2 lately. Our calculations also showed that FE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jeffrey Tannenbaum of Fir Tree
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the fresh hedge fund action surrounding FirstEnergy Corp. (NYSE:FE).
Hedge fund activity in FirstEnergy Corp. (NYSE:FE)
At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 38 hedge funds with a bullish position in FE a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Stuart J. Zimmer’s Zimmer Partners has the number one position in FirstEnergy Corp. (NYSE:FE), worth close to $1.0433 billion, accounting for 11.4% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies which holds a $463.2 million position; 0.4% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish consist of Jonathan Barrett and Paul Segal’s Luminus Management, Jos Shaver’s Electron Capital Partners and Jeffrey Tannenbaum’s Fir Tree. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to FirstEnergy Corp. (NYSE:FE), around 20.87% of its portfolio. Fir Tree is also relatively very bullish on the stock, earmarking 13.07 percent of its 13F equity portfolio to FE.
Because FirstEnergy Corp. (NYSE:FE) has faced a decline in interest from the smart money, logic holds that there is a sect of funds who sold off their full holdings by the end of the third quarter. Interestingly, Paul Singer’s Elliott Management said goodbye to the largest position of the “upper crust” of funds monitored by Insider Monkey, valued at an estimated $1072.1 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $28.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to FirstEnergy Corp. (NYSE:FE). These stocks are Verisk Analytics, Inc. (NASDAQ:VRSK), Discover Financial Services (NYSE:DFS), Cummins Inc. (NYSE:CMI), and Coca-Cola European Partners plc (NYSE:CCEP). All of these stocks’ market caps are closest to FE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VRSK | 30 | 668085 | 0 |
| DFS | 37 | 935893 | -2 |
| CMI | 31 | 857313 | -14 |
| CCEP | 16 | 125523 | 6 |
| Average | 28.5 | 646704 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $647 million. That figure was $2452 million in FE’s case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 16 bullish hedge fund positions. FirstEnergy Corp. (NYSE:FE) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately FE wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FE were disappointed as the stock returned -0.3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
