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How Did NRG Energy Inc (NRG) Perform In Comparison to Hedge Fund Favorites in 2019?

Debasis Saha

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like NRG Energy Inc (NYSE:NRG).

NRG Energy Inc (NYSE:NRG) has seen an increase in hedge fund sentiment of late. NRG was in 46 hedge funds' portfolios at the end of the third quarter of 2019. There were 42 hedge funds in our database with NRG positions at the end of the previous quarter. Our calculations also showed that NRG 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).

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' 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 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 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.

[caption id="attachment_745225" align="alignnone" width="1613"] Noam Gottesman of GLG Partners[/caption]

Noam Gottesman GLG Partners

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. With all of this in mind we're going to take a peek at the key hedge fund action regarding NRG Energy Inc (NYSE:NRG).

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

At Q3's end, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NRG over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Is NRG A Good Stock To Buy?

Among these funds, Steadfast Capital Management held the most valuable stake in NRG Energy Inc (NYSE:NRG), which was worth $241.4 million at the end of the third quarter. On the second spot was Brahman Capital which amassed $179.1 million worth of shares. GLG Partners, Citadel Investment Group, and Millennium 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 SAYA Management allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 18.56% of its 13F portfolio. Brahman Capital is also relatively very bullish on the stock, dishing out 17.13 percent of its 13F equity portfolio to NRG.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Electron Capital Partners, managed by Jos Shaver, initiated the most outsized position in NRG Energy Inc (NYSE:NRG). Electron Capital Partners had $38.4 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley's Polar Capital also made a $4.5 million investment in the stock during the quarter. The following funds were also among the new NRG investors: Jim O'Brien and Jonathan Dorfman's Napier Park Global Capital, John Brandmeyer's Cognios Capital, and Renee Yao's Neo Ivy Capital.

Let's now take a look at hedge fund activity in other stocks similar to NRG Energy Inc (NYSE:NRG). We will take a look at EPAM Systems Inc (NYSE:EPAM), Carvana Co. (NYSE:CVNA), Booz Allen Hamilton Holding Corporation (NYSE:BAH), and Elanco Animal Health Incorporated (NYSE:ELAN). This group of stocks' market values match NRG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EPAM,24,286367,1 CVNA,48,2000888,3 BAH,33,469671,2 ELAN,24,359109,-3 Average,32.25,779009,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $779 million. That figure was $1482 million in NRG's case. Carvana Co. (NYSE:CVNA) is the most popular stock in this table. On the other hand EPAM Systems Inc (NYSE:EPAM) is the least popular one with only 24 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately NRG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NRG were disappointed as the stock returned 1.5% in 2019 (through December 23rd) 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 many of these stocks already outperformed the market so far this year. 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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