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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 Energy Transfer L.P. (NYSE:ET).
Is ET stock a buy? Investors who are in the know were cutting their exposure. The number of bullish hedge fund positions retreated by 6 recently. Energy Transfer L.P. (NYSE:ET) was in 25 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 36. Our calculations also showed that ET isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 31 hedge funds in our database with ET holdings at the end of September.
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 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 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.
David Abrams of Abrams Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the CBD market is growing at a 33% annualized rate, so we are taking a closer look at this under-the-radar hemp stock. We go through lists like the 10 best biotech stocks under $10 to identify the next stock with 10x upside potential. 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. You can subscribe to our free daily newsletter on our website. Now we're going to review the new hedge fund action regarding Energy Transfer L.P. (NYSE:ET).
Do Hedge Funds Think ET Is A Good Stock To Buy Now?
Heading into the first quarter of 2021, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ET over the last 22 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, David Tepper's Appaloosa Management LP has the largest position in Energy Transfer L.P. (NYSE:ET), worth close to $148.7 million, accounting for 2.2% of its total 13F portfolio. The second most bullish fund manager is Abrams Capital Management, managed by David Abrams, which holds a $136.7 million position; the fund has 3.9% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish comprise Stuart J. Zimmer's Zimmer Partners, Bill Miller's Miller Value Partners and Leon Cooperman's Omega Advisors. In terms of the portfolio weights assigned to each position Raging Capital Management allocated the biggest weight to Energy Transfer L.P. (NYSE:ET), around 18.01% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, earmarking 7.77 percent of its 13F equity portfolio to ET.
Due to the fact that Energy Transfer L.P. (NYSE:ET) has experienced falling interest from the smart money, it's easy to see that there exists a select few fund managers who were dropping their entire stakes last quarter. Intriguingly, Louis Bacon's Moore Global Investments sold off the biggest investment of the "upper crust" of funds followed by Insider Monkey, totaling about $53.6 million in stock, and Tom Wagner and Ara Cohen's Knighthead Capital was right behind this move, as the fund cut about $1.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 6 funds last quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Energy Transfer L.P. (NYSE:ET) but similarly valued. These stocks are HEICO Corporation (NYSE:HEI), Invitation Homes Inc. (NYSE:INVH), FirstEnergy Corp. (NYSE:FE), Monolithic Power Systems, Inc. (NASDAQ:MPWR), The Liberty SiriusXM Group (NASDAQ:LSXMA), Carnival Corporation & plc (NYSE:CUK), and Logitech International SA (NASDAQ:LOGI). This group of stocks' market valuations are closest to ET's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HEI,44,786027,1 INVH,27,833637,-1 FE,50,1305329,-9 MPWR,30,640635,-7 LSXMA,42,1691626,0 CUK,7,116507,-6 LOGI,21,432791,6 Average,31.6,829507,-2.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $830 million. That figure was $543 million in ET's case. FirstEnergy Corp. (NYSE:FE) is the most popular stock in this table. On the other hand Carnival Corporation & plc (NYSE:CUK) is the least popular one with only 7 bullish hedge fund positions. Energy Transfer L.P. (NYSE:ET) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ET is 40.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and still beat the market by 0.9 percentage points. A small number of hedge funds were also right about betting on ET as the stock returned 33.1% since the end of the fourth quarter (through 4/19) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.
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