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2019 Review: Most Favored Hedge Fund Stocks vs. Energy Transfer L.P. (ET)

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Energy Transfer L.P. (NYSE:ET) was in 30 hedge funds' portfolios at the end of the third quarter of 2019. ET investors should pay attention to an increase in hedge fund sentiment lately. There were 29 hedge funds in our database with ET holdings at the end of the previous quarter. Our calculations also showed that ET isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Appaloosa Management Lp

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's view the new hedge fund action encompassing Energy Transfer L.P. (NYSE:ET).

Hedge fund activity in Energy Transfer L.P. (NYSE:ET)

At Q3's end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ET over the last 17 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Is ET A Good Stock To Buy?

The largest stake in Energy Transfer L.P. (NYSE:ET) was held by Zimmer Partners, which reported holding $145.4 million worth of stock at the end of September. It was followed by Appaloosa Management with a $76.6 million position. Other investors bullish on the company included Magnetar Capital, Omega Advisors, and Wexford Capital. In terms of the portfolio weights assigned to each position Whetstone Capital Advisors allocated the biggest weight to Energy Transfer L.P. (NYSE:ET), around 10.86% of its 13F portfolio. BP Capital is also relatively very bullish on the stock, designating 9.41 percent of its 13F equity portfolio to ET.

Now, some big names were leading the bulls' herd. Marshall Wace, managed by Paul Marshall and Ian Wace, initiated the most outsized position in Energy Transfer L.P. (NYSE:ET). Marshall Wace had $13.6 million invested in the company at the end of the quarter. Richard Chilton's Chilton Investment Company also made a $1.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Michael Price's MFP Investors, and John Orrico's Water Island Capital.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Energy Transfer L.P. (NYSE:ET) but similarly valued. These stocks are The Kraft Heinz Company (NASDAQ:KHC), NetEase, Inc (NASDAQ:NTES), Xcel Energy Inc (NYSE:XEL), and Thomson Reuters Corporation (NYSE:TRI). This group of stocks' market values resemble ET's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KHC,36,9572927,2 NTES,30,3513002,-4 XEL,17,573407,-1 TRI,19,360770,2 Average,25.5,3505027,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $3505 million. That figure was $623 million in ET's case. The Kraft Heinz Company (NASDAQ:KHC) is the most popular stock in this table. On the other hand Xcel Energy Inc (NYSE:XEL) is the least popular one with only 17 bullish hedge fund positions. Energy Transfer L.P. (NYSE:ET) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately ET wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ET were disappointed as the stock returned 7.7% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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