Was The Smart Money Wrong About NRG Energy Inc (NRG)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about NRG Energy Inc (NYSE:NRG).

NRG Energy Inc (NYSE:NRG) investors should pay attention to a decrease in hedge fund interest recently. NRG Energy Inc (NYSE:NRG) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 50. Our calculations also showed that NRG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 56 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.

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to review the fresh hedge fund action encompassing NRG Energy Inc (NYSE:NRG).

What does smart money think about NRG Energy Inc (NYSE:NRG)?

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NRG over the last 20 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.

According to Insider Monkey’s hedge fund database, Pzena Investment Management, managed by Richard S. Pzena, holds the most valuable position in NRG Energy Inc (NYSE:NRG). Pzena Investment Management has a $223.2 million position in the stock, comprising 1.5% of its 13F portfolio. Sitting at the No. 2 spot is Lyrical Asset Management, managed by Andrew Wellington and Jeff Keswin, which holds a $122.8 million position; 2.4% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish comprise Robert Pitts’s Steadfast Capital Management, Alex Duran and Scott Hendrickson’s Permian Investment Partners and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Permian Investment Partners allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 19.07% of its 13F portfolio. SAYA Management is also relatively very bullish on the stock, setting aside 11.46 percent of its 13F equity portfolio to NRG.

Judging by the fact that NRG Energy Inc (NYSE:NRG) has faced falling interest from hedge fund managers, we can see that there were a few hedgies who were dropping their positions entirely last quarter. At the top of the heap, Steve Cohen’s Point72 Asset Management sold off the biggest investment of all the hedgies watched by Insider Monkey, comprising an estimated $39.3 million in stock. Jonathan Barrett and Paul Segal’s fund, Luminus Management, also sold off its stock, about $30.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as NRG Energy Inc (NYSE:NRG) but similarly valued. We will take a look at Globe Life Inc. (NYSE:GL), Universal Health Services, Inc. (NYSE:UHS), Paylocity Holding Corp (NASDAQ:PCTY), Regency Centers Corp (NASDAQ:REG), Generac Holdings Inc. (NYSE:GNRC), Elastic N.V. (NYSE:ESTC), and Tenaris S.A. (NYSE:TS). This group of stocks’ market valuations match NRG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.7 hedge funds with bullish positions and the average amount invested in these stocks was $545 million. That figure was $1095 million in NRG’s case. Elastic N.V. (NYSE:ESTC) is the most popular stock in this table. On the other hand Tenaris S.A. (NYSE:TS) is the least popular one with only 12 bullish hedge fund positions. NRG Energy Inc (NYSE:NRG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NRG is 63.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately NRG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NRG were disappointed as the stock returned -1.1% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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.