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. With this in mind let’s see whether Energy Transfer L.P. (NYSE:ET) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is Energy Transfer L.P. (NYSE:ET) a healthy stock for your portfolio? Money managers are taking an optimistic view. The number of bullish hedge fund bets rose by 2 recently. Our calculations also showed that ET 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.
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 S&P 500 ETFs by more than 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. 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.
David Tepper of Appaloosa Management LP
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the new hedge fund action surrounding Energy Transfer L.P. (NYSE:ET).
Hedge fund activity in Energy Transfer L.P. (NYSE:ET)
Heading into the first quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ET over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Appaloosa Management LP held the most valuable stake in Energy Transfer L.P. (NYSE:ET), which was worth $144.1 million at the end of the third quarter. On the second spot was Zimmer Partners which amassed $135.7 million worth of shares. Omega Advisors, Magnetar Capital, and Highland 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 Everett Capital Advisors allocated the biggest weight to Energy Transfer L.P. (NYSE:ET), around 100% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, designating 12.16 percent of its 13F equity portfolio to ET.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Lomas Capital Management, managed by Daniel Lascano, established the biggest position in Energy Transfer L.P. (NYSE:ET). Lomas Capital Management had $18.1 million invested in the company at the end of the quarter. Allan Teh’s Kamunting Street Capital also made a $11.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Richard Driehaus’s Driehaus Capital, Alex Lieblong’s Key Colony Management, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Energy Transfer L.P. (NYSE:ET) but similarly valued. These stocks are Monster Beverage Corp (NASDAQ:MNST), Carnival Corporation & Plc (NYSE:CUK), Cognizant Technology Solutions Corp (NASDAQ:CTSH), and China Telecom Corporation Limited (NYSE:CHA). This group of stocks’ market caps match ET’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MNST | 45 | 3533015 | 9 |
| CUK | 14 | 154668 | 3 |
| CTSH | 43 | 2935648 | -5 |
| CHA | 7 | 23480 | -2 |
| Average | 27.25 | 1661703 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $1662 million. That figure was $719 million in ET’s case. Monster Beverage Corp (NASDAQ:MNST) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 7 bullish hedge fund positions. Energy Transfer L.P. (NYSE:ET) 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 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately ET wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ET were disappointed as the stock returned -43.7% 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.
