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Did Hedge Funds Make The Right Call On NRG Energy Inc (NRG) ?

Asma UL Husna
·5 mins read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding NRG Energy Inc (NYSE:NRG) and determine whether hedge funds had an edge regarding this stock.

Is NRG Energy Inc (NYSE:NRG) a marvelous investment right now? Prominent investors were in a bearish mood. The number of long hedge fund bets were cut by 4 lately. Our calculations also showed that NRG 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.

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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 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.

[caption id="attachment_338857" align="aligncenter" width="392"] Charles Davidson of Wexford Capital[/caption]

Charles Davidson - Wexford Capital
Charles Davidson - Wexford Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Now let's take a look at the latest hedge fund action encompassing NRG Energy Inc (NYSE:NRG).

What does smart money think about NRG Energy Inc (NYSE:NRG)?

At Q1's end, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in NRG over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Citadel Investment Group held the most valuable stake in NRG Energy Inc (NYSE:NRG), which was worth $112.2 million at the end of the third quarter. On the second spot was GLG Partners which amassed $94.5 million worth of shares. Renaissance Technologies, Permian Investment Partners, 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 Permian Investment Partners allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 22.24% of its 13F portfolio. SAYA Management is also relatively very bullish on the stock, earmarking 14.1 percent of its 13F equity portfolio to NRG.

Since NRG Energy Inc (NYSE:NRG) has witnessed declining sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of hedge funds who sold off their full holdings last quarter. Interestingly, Leon Cooperman's Omega Advisors dropped the biggest stake of the 750 funds monitored by Insider Monkey, worth an estimated $46.7 million in stock. George Soros's fund, Soros Fund Management, also cut its stock, about $19.1 million worth. These transactions are important to note, as total hedge fund interest was cut by 4 funds last quarter.

Let's now review hedge fund activity in other stocks similar to NRG Energy Inc (NYSE:NRG). We will take a look at Americold Realty Trust (NYSE:COLD), Mobile TeleSystems Public Joint Stock Company (NYSE:MBT), Mellanox Technologies, Ltd. (NASDAQ:MLNX), and Kilroy Realty Corp (NYSE:KRC). This group of stocks' market values resemble NRG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COLD,25,275635,-1 MBT,9,377645,-4 MLNX,44,1873688,5 KRC,20,180763,2 Average,24.5,676933,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $677 million. That figure was $860 million in NRG's case. Mellanox Technologies, Ltd. (NASDAQ:MLNX) is the most popular stock in this table. On the other hand Mobile TeleSystems Public Joint Stock Company (NYSE:MBT) is the least popular one with only 9 bullish hedge fund positions. NRG Energy Inc (NYSE:NRG) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on NRG, though not to the same extent, as the stock returned 20.5% during the second quarter and outperformed the market as well.

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

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