Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Companhia Energetica de Minas Gerais (NYSE:CIG) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds' portfolios at the end of September. At the end of this article we will also compare CIG to other stocks including Choice Hotels International, Inc. (NYSE:CHH), Southwest Gas Holdings, Inc. (NYSE:SWX), and MasTec, Inc. (NYSE:MTZ) to get a better sense of its popularity. Video: Click the image to 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' 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_26794" align="aligncenter" width="359"] Paul Tudor Jones of Tudor Investment Corp[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the recent hedge fund action encompassing Companhia Energetica de Minas Gerais (NYSE:CIG).
Hedge fund activity in Companhia Energetica de Minas Gerais (NYSE:CIG)
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in CIG a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
The largest stake in Companhia Energetica de Minas Gerais (NYSE:CIG) was held by AQR Capital Management, which reported holding $23.3 million worth of stock at the end of September. It was followed by Millennium Management with a $12 million position. Other investors bullish on the company included Renaissance Technologies, Arrowstreet Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position McKinley Capital Management allocated the biggest weight to Companhia Energetica de Minas Gerais (NYSE:CIG), around 0.04% of its 13F portfolio. AQR Capital Management is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to CIG.
Because Companhia Energetica de Minas Gerais (NYSE:CIG) has witnessed bearish sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of funds that elected to cut their positions entirely in the third quarter. Interestingly, Michael Gelband's ExodusPoint Capital cut the biggest stake of all the hedgies followed by Insider Monkey, valued at an estimated $0.1 million in call options. Ken Griffin's fund, Citadel Investment Group, also said goodbye to its call options, about $0.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Companhia Energetica de Minas Gerais (NYSE:CIG) but similarly valued. These stocks are Choice Hotels International, Inc. (NYSE:CHH), Southwest Gas Holdings, Inc. (NYSE:SWX), MasTec, Inc. (NYSE:MTZ), and Churchill Downs Incorporated (NASDAQ:CHDN). All of these stocks' market caps match CIG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHH,20,171880,1 SWX,20,252769,4 MTZ,32,208174,4 CHDN,25,720523,0 Average,24.25,338337,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $338 million. That figure was $55 million in CIG's case. MasTec, Inc. (NYSE:MTZ) is the most popular stock in this table. On the other hand Choice Hotels International, Inc. (NYSE:CHH) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Companhia Energetica de Minas Gerais (NYSE:CIG) is even less popular than CHH. Hedge funds dodged a bullet by taking a bearish stance towards CIG. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CIG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CIG investors were disappointed as the stock returned -10.6% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.