Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published this article and 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.
Is Vistra Energy Corp. (NYSE:VST) a buy right now? Investors who are in the know are turning bullish. The number of bullish hedge fund positions improved by 4 recently. Our calculations also showed that VST isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). VST was in 49 hedge funds’ portfolios at the end of December. There were 45 hedge funds in our database with VST holdings at the end of the previous quarter.
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.
Howard Marks of Oaktree 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. Now we’re going to review the fresh hedge fund action encompassing Vistra Energy Corp. (NYSE:VST).
What does smart money think about Vistra Energy Corp. (NYSE:VST)?
At the end of the fourth quarter, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in VST over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, Oaktree Capital Management was the largest shareholder of Vistra Energy Corp. (NYSE:VST), with a stake worth $627.1 million reported as of the end of September. Trailing Oaktree Capital Management was Avenue Capital, which amassed a stake valued at $148 million. GLG Partners, Highland Capital Management, and Renaissance Technologies 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 Avenue Capital allocated the biggest weight to Vistra Energy Corp. (NYSE:VST), around 49.64% of its 13F portfolio. Angelo Gordon & Co is also relatively very bullish on the stock, dishing out 17.47 percent of its 13F equity portfolio to VST.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Laurion Capital Management, managed by Benjamin A. Smith, established the largest position in Vistra Energy Corp. (NYSE:VST). Laurion Capital Management had $46 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $28 million position during the quarter. The following funds were also among the new VST investors: Simon Sadler’s Segantii Capital, Dmitry Balyasny’s Balyasny Asset Management, and Matthew L Pinz’s Pinz Capital.
Let’s also examine hedge fund activity in other stocks similar to Vistra Energy Corp. (NYSE:VST). We will take a look at Datadog, Inc. (NASDAQ:DDOG), West Pharmaceutical Services Inc. (NYSE:WST), Brown & Brown, Inc. (NYSE:BRO), and Melco Resorts & Entertainment Limited (NASDAQ:MLCO). All of these stocks’ market caps are similar to VST’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DDOG | 32 | 439020 | -7 |
| WST | 29 | 428409 | -5 |
| BRO | 23 | 703042 | -8 |
| MLCO | 35 | 836262 | 8 |
| Average | 29.75 | 601683 | -3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $602 million. That figure was $2192 million in VST’s case. Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is the most popular stock in this table. On the other hand Brown & Brown, Inc. (NYSE:BRO) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Vistra Energy Corp. (NYSE:VST) is more popular among hedge funds. 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 and still beat the market by 1.9 percentage points. Unfortunately VST wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on VST were disappointed as the stock returned -19.8% during the first two months of 2020 (through March 9th) 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.
