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Did Hedge Funds Drop The Ball On Pattern Energy Group Inc (PEGI)?

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 Pattern Energy Group Inc (NASDAQ:PEGI).

Pattern Energy Group Inc (NASDAQ:PEGI) was in 12 hedge funds' portfolios at the end of the second quarter of 2019. PEGI shareholders have witnessed an increase in activity from the world's largest hedge funds lately. There were 10 hedge funds in our database with PEGI holdings at the end of the previous quarter. Our calculations also showed that PEGI isn't among the 30 most popular stocks among hedge funds (see the video below).

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

PEGI_oct2019
PEGI_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to analyze the recent hedge fund action regarding Pattern Energy Group Inc (NASDAQ:PEGI).

How are hedge funds trading Pattern Energy Group Inc (NASDAQ:PEGI)?

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in PEGI over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Bernard Lambilliotte - Ecofin
Bernard Lambilliotte - Ecofin

Of the funds tracked by Insider Monkey, GLG Partners, managed by Noam Gottesman, holds the largest position in Pattern Energy Group Inc (NASDAQ:PEGI). GLG Partners has a $11.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Ecofin Ltd, managed by Bernard Lambilliotte, which holds a $8.7 million position; 4.3% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that hold long positions consist of Matthew Hulsizer's PEAK6 Capital Management, Brian Ashford-Russell and Tim Woolley's Polar Capital and John Overdeck and David Siegel's Two Sigma Advisors.

Consequently, key hedge funds have jumped into Pattern Energy Group Inc (NASDAQ:PEGI) headfirst. Ecofin Ltd, managed by Bernard Lambilliotte, created the biggest position in Pattern Energy Group Inc (NASDAQ:PEGI). Ecofin Ltd had $8.7 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley's Polar Capital also initiated a $5.1 million position during the quarter. The other funds with brand new PEGI positions are Renaissance Technologies, Dmitry Balyasny's Balyasny Asset Management, and Steve Cohen's Point72 Asset Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Pattern Energy Group Inc (NASDAQ:PEGI) but similarly valued. These stocks are Welbilt, Inc. (NYSE:WBT), MyoKardia, Inc. (NASDAQ:MYOK), Universal Forest Products, Inc. (NASDAQ:UFPI), and Power Integrations Inc (NASDAQ:POWI). This group of stocks' market values are closest to PEGI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WBT,25,850267,-2 MYOK,24,732265,-10 UFPI,17,64097,-3 POWI,9,83455,3 Average,18.75,432521,-3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $433 million. That figure was $36 million in PEGI's case. Welbilt, Inc. (NYSE:WBT) is the most popular stock in this table. On the other hand Power Integrations Inc (NASDAQ:POWI) is the least popular one with only 9 bullish hedge fund positions. Pattern Energy Group Inc (NASDAQ:PEGI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on PEGI as the stock returned 18.5% during the same time frame and outperformed the market by an even larger margin.

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

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