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. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Sempra Energy (NYSE:SRE)? The smart money sentiment can provide an answer to this question.
Sempra Energy (NYSE:SRE) has experienced an increase in hedge fund interest in recent months. SRE was in 35 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 31 hedge funds in our database with SRE positions at the end of the previous quarter. Our calculations also showed that SRE 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.
Phill Gross of Adage Capital 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 we’re going to analyze the fresh hedge fund action surrounding Sempra Energy (NYSE:SRE).
Hedge fund activity in Sempra Energy (NYSE:SRE)
At the end of the fourth quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SRE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Adage Capital Management held the most valuable stake in Sempra Energy (NYSE:SRE), which was worth $204.7 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $138.5 million worth of shares. AQR Capital Management, D E Shaw, and Carlson Capital 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 Blackstart Capital allocated the biggest weight to Sempra Energy (NYSE:SRE), around 3.26% of its 13F portfolio. Ecofin Ltd is also relatively very bullish on the stock, setting aside 1.52 percent of its 13F equity portfolio to SRE.
As aggregate interest increased, some big names have jumped into Sempra Energy (NYSE:SRE) headfirst. D E Shaw, managed by D. E. Shaw, assembled the most outsized position in Sempra Energy (NYSE:SRE). D E Shaw had $13.9 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $10.2 million position during the quarter. The other funds with new positions in the stock are Sara Nainzadeh’s Centenus Global Management, Brian Olson, Baehyun Sung, and Jamie Waters’s Blackstart Capital, and Israel Englander’s Millennium Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Sempra Energy (NYSE:SRE) but similarly valued. We will take a look at Baxter International Inc. (NYSE:BAX), Lam Research Corporation (NASDAQ:LRCX), The Progressive Corporation (NYSE:PGR), and BCE Inc. (NYSE:BCE). This group of stocks’ market values are closest to SRE’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BAX | 47 | 3519863 | 8 |
| LRCX | 52 | 2625592 | 0 |
| PGR | 48 | 1782118 | -5 |
| BCE | 19 | 219572 | 5 |
| Average | 41.5 | 2036786 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $2037 million. That figure was $717 million in SRE’s case. Lam Research Corporation (NASDAQ:LRCX) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 19 bullish hedge fund positions. Sempra Energy (NYSE:SRE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 SRE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SRE investors were disappointed as the stock returned -18.8% 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 most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
