Were Hedge Funds Right About Selling PG&E Corporation (PCG)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards PG&E Corporation (NYSE:PCG).

PG&E Corporation (NYSE:PCG) has seen a decrease in support from the world’s most elite money managers of late. PG&E Corporation (NYSE:PCG) was in 66 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 92. There were 76 hedge funds in our database with PCG positions at the end of the third quarter. Our calculations also showed that PCG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Dan Loeb of Third Point

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. With all of this in mind let’s go over the new hedge fund action regarding PG&E Corporation (NYSE:PCG).

Do Hedge Funds Think PCG Is A Good Stock To Buy Now?

At fourth quarter’s end, a total of 66 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PCG over the last 22 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, Third Point held the most valuable stake in PG&E Corporation (NYSE:PCG), which was worth $1058.3 million at the end of the fourth quarter. On the second spot was Zimmer Partners which amassed $687.5 million worth of shares. Appaloosa Management LP, Silver Point Capital, and Steadfast Capital Management 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 Silver Point Capital allocated the biggest weight to PG&E Corporation (NYSE:PCG), around 49.7% of its 13F portfolio. Cyrus Capital Partners is also relatively very bullish on the stock, dishing out 40.17 percent of its 13F equity portfolio to PCG.

Judging by the fact that PG&E Corporation (NYSE:PCG) has experienced bearish sentiment from the smart money, logic holds that there is a sect of money managers who were dropping their entire stakes by the end of the fourth quarter. Interestingly, Scott Ferguson’s Sachem Head Capital said goodbye to the largest stake of all the hedgies followed by Insider Monkey, comprising an estimated $58.7 million in stock, and Nathaniel August’s Mangrove Partners was right behind this move, as the fund cut about $43.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 10 funds by the end of the fourth quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as PG&E Corporation (NYSE:PCG) but similarly valued. We will take a look at Verisign, Inc. (NASDAQ:VRSN), Keysight Technologies Inc (NYSE:KEYS), ArcelorMittal (NYSE:MT), Coupa Software Incorporated (NASDAQ:COUP), Yandex NV (NASDAQ:YNDX), Slack Technologies Inc (NYSE:WORK), and Fresenius Medical Care AG & Co. KGaA  (NYSE:FMS). This group of stocks’ market caps are similar to PCG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.6 hedge funds with bullish positions and the average amount invested in these stocks was $2467 million. That figure was $6652 million in PCG’s case. Slack Technologies Inc (NYSE:WORK) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. KGaA  (NYSE:FMS) is the least popular one with only 9 bullish hedge fund positions. PG&E Corporation (NYSE:PCG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PCG is 66.5. 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. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and beat the market again by 0.9 percentage points. Unfortunately PCG wasn’t nearly as popular as these 30 stocks and hedge funds that were betting on PCG were disappointed as the stock returned -10.1% since the end of December (through 4/19) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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