Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish 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. 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) going to take off soon? The best stock pickers are reducing their bets on the stock. The number of bullish hedge fund bets dropped by 6 in recent months. Our calculations also showed that NRG 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.
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 41 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.
Israel Englander of Millennium 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, 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 take a look at the recent hedge fund action encompassing NRG Energy Inc (NYSE:NRG).
Hedge fund activity in NRG Energy Inc (NYSE:NRG)
At the end of the fourth quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. By comparison, 49 hedge funds held shares or bullish call options in NRG a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in NRG Energy Inc (NYSE:NRG), which was worth $189 million at the end of the third quarter. On the second spot was Steadfast Capital Management which amassed $181.1 million worth of shares. GLG Partners, Brahman Capital, and Millennium 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 SAYA Management allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 19.57% of its 13F portfolio. Permian Investment Partners is also relatively very bullish on the stock, designating 14.01 percent of its 13F equity portfolio to NRG.
Because NRG Energy Inc (NYSE:NRG) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there were a few money managers that elected to cut their positions entirely last quarter. Intriguingly, Jonathan Barrett and Paul Segal’s Luminus Management cut the biggest position of the 750 funds followed by Insider Monkey, comprising an estimated $82.9 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund dumped about $21.6 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 6 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as NRG Energy Inc (NYSE:NRG) but similarly valued. We will take a look at Booz Allen Hamilton Holding Corporation (NYSE:BAH), Devon Energy Corporation (NYSE:DVN), RPM International Inc. (NYSE:RPM), and CPFL Energia S.A. (NYSE:CPL). This group of stocks’ market valuations match NRG’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BAH | 34 | 400542 | -1 |
| DVN | 54 | 914072 | 12 |
| RPM | 31 | 301067 | -3 |
| CPL | 4 | 15007 | 1 |
| Average | 30.75 | 407672 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $408 million. That figure was $1399 million in NRG’s case. Devon Energy Corporation (NYSE:DVN) is the most popular stock in this table. On the other hand CPFL Energia S.A. (NYSE:CPL) is the least popular one with only 4 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. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but beat the market by 1.9 percentage points. Unfortunately NRG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on NRG were disappointed as the stock returned -23.6% during the same time period 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.
