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 in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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 Sempra Energy (NYSE:SRE).
Sempra Energy (NYSE:SRE) shareholders have witnessed a decrease in hedge fund interest in recent months. Our calculations also showed that SRE isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let’s take a look at the latest hedge fund action surrounding Sempra Energy (NYSE:SRE).
What does the smart money think about Sempra Energy (NYSE:SRE)?
At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SRE over the last 15 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Elliott Management held the most valuable stake in Sempra Energy (NYSE:SRE), which was worth $1428.5 million at the end of the first quarter. On the second spot was Zimmer Partners which amassed $1030.1 million worth of shares. Moreover, Electron Capital Partners, Citadel Investment Group, and AQR Capital Management were also bullish on Sempra Energy (NYSE:SRE), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Sempra Energy (NYSE:SRE) has witnessed bearish sentiment from the smart money, we can see that there was a specific group of fund managers that slashed their entire stakes last quarter. It’s worth mentioning that Jonathan Barrett and Paul Segal’s Luminus Management sold off the biggest stake of all the hedgies followed by Insider Monkey, valued at about $18.5 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also said goodbye to its stock, about $3.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 3 funds last quarter.
Let’s now review hedge fund activity in other stocks similar to Sempra Energy (NYSE:SRE). We will take a look at Ross Stores, Inc. (NASDAQ:ROST), Ford Motor Company (NYSE:F), V.F. Corporation (NYSE:VFC), and SYSCO Corporation (NYSE:SYY). All of these stocks’ market caps are similar to SRE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ROST | 29 | 907288 | -4 |
| F | 33 | 1106452 | 0 |
| VFC | 29 | 1091453 | 2 |
| SYY | 36 | 2944902 | 2 |
| Average | 31.75 | 1512524 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $1513 million. That figure was $2902 million in SRE’s case. SYSCO Corporation (NYSE:SYY) is the most popular stock in this table. On the other hand Ross Stores, Inc. (NASDAQ:ROST) is the least popular one with only 29 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on SRE as the stock returned 4.5% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
