At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards El Paso Electric Company (NYSE:EE) at the end of the first quarter and determine whether the smart money was really smart about this stock.
El Paso Electric Company (NYSE:EE) was in 23 hedge funds' portfolios at the end of March. EE investors should pay attention to an increase in activity from the world's largest hedge funds of late. There were 15 hedge funds in our database with EE positions at the end of the previous quarter. Our calculations also showed that EE isn't among the 30 most popular stocks among hedge funds (click for Q1 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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Donald Sussman of Paloma Partners[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let's take a look at the latest hedge fund action encompassing El Paso Electric Company (NYSE:EE).
How are hedge funds trading El Paso Electric Company (NYSE:EE)?
At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 53% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in EE a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
More specifically, Alpine Associates was the largest shareholder of El Paso Electric Company (NYSE:EE), with a stake worth $81.3 million reported as of the end of September. Trailing Alpine Associates was GAMCO Investors, which amassed a stake valued at $77.5 million. Renaissance Technologies, Beryl Capital Management, and Halcyon Asset 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 Beryl Capital Management allocated the biggest weight to El Paso Electric Company (NYSE:EE), around 8.76% of its 13F portfolio. Halcyon Asset Management is also relatively very bullish on the stock, designating 5.41 percent of its 13F equity portfolio to EE.
As industrywide interest jumped, key money managers were leading the bulls' herd. Melqart Asset Management, managed by Michel Massoud, created the most valuable position in El Paso Electric Company (NYSE:EE). Melqart Asset Management had $20.7 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also initiated a $19.6 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny's Balyasny Asset Management, John Overdeck and David Siegel's Two Sigma Advisors, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.
Let's check out hedge fund activity in other stocks similar to El Paso Electric Company (NYSE:EE). We will take a look at Rexnord Corp (NYSE:RXN), Simpson Manufacturing Co, Inc. (NYSE:SSD), New Relic Inc (NYSE:NEWR), and WD-40 Company (NASDAQ:WDFC). This group of stocks' market valuations are closest to EE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RXN,19,213250,-6 SSD,26,197022,2 NEWR,31,809963,-13 WDFC,17,199539,0 Average,23.25,354944,-4.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $355 million. That figure was $398 million in EE's case. New Relic Inc (NYSE:NEWR) is the most popular stock in this table. On the other hand WD-40 Company (NASDAQ:WDFC) is the least popular one with only 17 bullish hedge fund positions. El Paso Electric Company (NYSE:EE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately EE wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EE investors were disappointed as the stock returned -0.8% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.