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 (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Xcel Energy Inc (NYSE:XEL).
Is Xcel Energy Inc (NYSE:XEL) a great investment right now? Investors who are in the know are taking a pessimistic view. The number of long hedge fund bets decreased by 3 lately. Our calculations also showed that XEL isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). XEL was in 15 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 18 hedge funds in our database with XEL holdings at the end of the previous quarter.
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.
Cliff Asness of AQR Capital Management
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 go over the key hedge fund action encompassing Xcel Energy Inc (NYSE:XEL).
How are hedge funds trading Xcel Energy Inc (NASDAQ:XEL)?
Heading into the first quarter of 2020, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. By comparison, 21 hedge funds held shares or bullish call options in XEL a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the most valuable position in Xcel Energy Inc (NASDAQ:XEL), worth close to $235.3 million, comprising 0.2% of its total 13F portfolio. On Renaissance Technologies’s heels is AQR Capital Management, led by Cliff Asness, holding a $58.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers with similar optimism comprise Israel Englander’s Millennium Management, Steve Cohen’s Point72 Asset Management and Sara Nainzadeh’s Centenus Global Management. In terms of the portfolio weights assigned to each position Centenus Global Management allocated the biggest weight to Xcel Energy Inc (NASDAQ:XEL), around 2.17% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.18 percent of its 13F equity portfolio to XEL.
Due to the fact that Xcel Energy Inc (NASDAQ:XEL) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there is a sect of funds that decided to sell off their positions entirely last quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management sold off the largest stake of the 750 funds watched by Insider Monkey, comprising close to $27.8 million in stock, and Stuart J. Zimmer’s Zimmer Partners was right behind this move, as the fund dropped about $13.5 million worth. These transactions are important to note, as total hedge fund interest fell by 3 funds last quarter.
Let’s check out hedge fund activity in other stocks similar to Xcel Energy Inc (NASDAQ:XEL). We will take a look at Credit Suisse Group AG (NYSE:CS), Tyson Foods, Inc. (NYSE:TSN), Welltower Inc. (NYSE:WELL), and O’Reilly Automotive Inc (NASDAQ:ORLY). This group of stocks’ market values are similar to XEL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CS | 10 | 229482 | -4 |
| TSN | 58 | 2187017 | 5 |
| WELL | 24 | 533196 | 7 |
| ORLY | 64 | 2318640 | 17 |
| Average | 39 | 1317084 | 6.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1317 million. That figure was $394 million in XEL’s case. O’Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 10 bullish hedge fund positions. Xcel Energy Inc (NASDAQ:XEL) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on XEL as the stock returned -11.9% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
