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2019 Review: Most Favored Hedge Fund Stocks vs. FirstEnergy Corp. (FE)

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in FirstEnergy Corp. (NYSE:FE).

Is FirstEnergy Corp. (NYSE:FE) a healthy stock for your portfolio? Prominent investors are turning less bullish. The number of bullish hedge fund bets fell by 2 lately. Our calculations also showed that FE 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). FE was in 32 hedge funds' portfolios at the end of the third quarter of 2019. There were 34 hedge funds in our database with FE positions at the end of the previous quarter.

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.

[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]

RENAISSANCE TECHNOLOGIES

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. Keeping this in mind we're going to take a look at the key hedge fund action surrounding FirstEnergy Corp. (NYSE:FE).

How are hedge funds trading FirstEnergy Corp. (NYSE:FE)?

At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the second quarter of 2019. By comparison, 38 hedge funds held shares or bullish call options in FE a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Is FE A Good Stock To Buy?

More specifically, Zimmer Partners was the largest shareholder of FirstEnergy Corp. (NYSE:FE), with a stake worth $1043.3 million reported as of the end of September. Trailing Zimmer Partners was Renaissance Technologies, which amassed a stake valued at $463.2 million. Luminus Management, Electron Capital Partners, and Fir Tree 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 Electron Capital Partners allocated the biggest weight to FirstEnergy Corp. (NYSE:FE), around 20.87% of its 13F portfolio. Fir Tree is also relatively very bullish on the stock, designating 13.07 percent of its 13F equity portfolio to FE.

Due to the fact that FirstEnergy Corp. (NYSE:FE) has faced falling interest from hedge fund managers, it's easy to see that there lies a certain "tier" of funds who sold off their full holdings last quarter. Interestingly, Paul Singer's Elliott Management cut the largest position of all the hedgies monitored by Insider Monkey, worth about $1072.1 million in stock. Steve Cohen's fund, Point72 Asset Management, also said goodbye to its stock, about $28.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds last quarter.

Let's now review hedge fund activity in other stocks similar to FirstEnergy Corp. (NYSE:FE). We will take a look at Verisk Analytics, Inc. (NASDAQ:VRSK), Discover Financial Services (NYSE:DFS), Cummins Inc. (NYSE:CMI), and Coca-Cola European Partners plc (NYSE:CCEP). This group of stocks' market valuations resemble FE's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRSK,30,668085,0 DFS,37,935893,-2 CMI,31,857313,-14 CCEP,16,125523,6 Average,28.5,646704,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $647 million. That figure was $2452 million in FE's case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 16 bullish hedge fund positions. FirstEnergy Corp. (NYSE:FE) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on FE, though not to the same extent, as the stock returned 33.6% during 2019 (as of 12/23) and outperformed the market as well. 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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