Were Hedge Funds Right About Crowding Into NextEra Energy, Inc. (NEE)?

In this article we are going to use hedge fund sentiment as a tool and determine whether NextEra Energy, Inc. (NYSE:NEE) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

NextEra Energy, Inc. (NYSE:NEE) has seen an increase in support from the world’s most elite money managers lately. NextEra Energy, Inc. (NYSE:NEE) was in 55 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 52. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that NEE 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.

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 58 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.

Alex Litowitz of Magnetar Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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 view the latest hedge fund action surrounding NextEra Energy, Inc. (NYSE:NEE).

What have hedge funds been doing with NextEra Energy, Inc. (NYSE:NEE)?

At the end of the second quarter, a total of 55 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the previous quarter. On the other hand, there were a total of 40 hedge funds with a bullish position in NEE a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Ken Fisher’s Fisher Asset Management has the number one position in NextEra Energy, Inc. (NYSE:NEE), worth close to $705.7 million, accounting for 0.7% of its total 13F portfolio. Coming in second is AQR Capital Management, managed by Cliff Asness, which holds a $172 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions encompass Ken Griffin’s Citadel Investment Group, D. E. Shaw’s D E Shaw and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Inherent Group allocated the biggest weight to NextEra Energy, Inc. (NYSE:NEE), around 14.19% of its 13F portfolio. Ecofin Ltd is also relatively very bullish on the stock, dishing out 12.22 percent of its 13F equity portfolio to NEE.

As aggregate interest increased, key hedge funds were breaking ground themselves. Fisher Asset Management, managed by Ken Fisher, initiated the most outsized position in NextEra Energy, Inc. (NYSE:NEE). Fisher Asset Management had $705.7 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also made a $22.1 million investment in the stock during the quarter. The following funds were also among the new NEE investors: Donald Sussman’s Paloma Partners, Tony Davis’s Inherent Group, and Alec Litowitz and Ross Laser’s Magnetar Capital.

Let’s now review hedge fund activity in other stocks similar to NextEra Energy, Inc. (NYSE:NEE). These stocks are Texas Instruments Incorporated (NASDAQ:TXN), Union Pacific Corporation (NYSE:UNP), American Tower Corporation (REIT) (NYSE:AMT), Shopify Inc (NYSE:SHOP), Linde plc (NYSE:LIN), Philip Morris International Inc. (NYSE:PM), and International Business Machines Corp. (NYSE:IBM). This group of stocks’ market caps are similar to NEE’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 56 hedge funds with bullish positions and the average amount invested in these stocks was $3325 million. That figure was $1944 million in NEE’s case. Union Pacific Corporation (NYSE:UNP) is the most popular stock in this table. On the other hand International Business Machines Corp. (NYSE:IBM) is the least popular one with only 46 bullish hedge fund positions. NextEra Energy, Inc. (NYSE:NEE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NEE is 58.5. 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. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. A small number of hedge funds were also right about betting on NEE as the stock returned 27.9% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.