We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Pinnacle West Capital Corporation (NYSE:PNW).
Is Pinnacle West Capital Corporation (NYSE:PNW) a bargain? The best stock pickers are taking an optimistic view. The number of long hedge fund positions increased by 1 lately. Our calculations also showed that PNW 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). PNW was in 24 hedge funds' portfolios at the end of the third quarter of 2019. There were 23 hedge funds in our database with PNW holdings at the end of the previous quarter.
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 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. 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.
[caption id="attachment_27676" align="aligncenter" width="355"] Israel Englander of Millennium Management[/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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Now let's take a peek at the recent hedge fund action encompassing Pinnacle West Capital Corporation (NYSE:PNW).
What have hedge funds been doing with Pinnacle West Capital Corporation (NYSE:PNW)?
At Q3's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in PNW over the last 17 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Pinnacle West Capital Corporation (NYSE:PNW), with a stake worth $421.2 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $314.5 million. GLG Partners, D E Shaw, 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 AQR Capital Management allocated the biggest weight to Pinnacle West Capital Corporation (NYSE:PNW), around 0.5% of its 13F portfolio. Qtron Investments is also relatively very bullish on the stock, earmarking 0.31 percent of its 13F equity portfolio to PNW.
With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. D E Shaw, managed by David E. Shaw, created the largest position in Pinnacle West Capital Corporation (NYSE:PNW). D E Shaw had $24.7 million invested in the company at the end of the quarter. Stuart J. Zimmer's Zimmer Partners also made a $4.1 million investment in the stock during the quarter. The following funds were also among the new PNW investors: David Harding's Winton Capital Management, Benjamin A. Smith's Laurion Capital Management, and Karim Abbadi and Edward McBride's Centiva Capital.
Let's now take a look at hedge fund activity in other stocks similar to Pinnacle West Capital Corporation (NYSE:PNW). These stocks are DocuSign, Inc. (NASDAQ:DOCU), AXA Equitable Holdings, Inc. (NYSE:EQH), The AES Corporation (NYSE:AES), and Everest Re Group Ltd (NYSE:RE). This group of stocks' market valuations are closest to PNW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOCU,26,673817,0 EQH,21,1062610,-11 AES,24,441027,-3 RE,21,667060,-2 Average,23,711129,-4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $711 million. That figure was $865 million in PNW's case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand AXA Equitable Holdings, Inc. (NYSE:EQH) is the least popular one with only 21 bullish hedge fund positions. Pinnacle West Capital Corporation (NYSE:PNW) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately PNW wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PNW were disappointed as the stock returned 9.1% in 2019 and trailed 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.
Disclosure: None. This article was originally published at Insider Monkey.