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Hedge Fund Darlings vs. The AES Corporation (AES) In 2019

Reymerlyn Martin

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 The AES Corporation (NYSE:AES).

Is The AES Corporation (NYSE:AES) the right pick for your portfolio? The smart money is in a bearish mood. The number of long hedge fund bets retreated by 3 in recent months. Our calculations also showed that AES 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).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30493" align="aligncenter" width="600"] Jeffrey Ubben of ValueAct Capital[/caption]

Jeff Ubben VALUEACT CAPITAL

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. With all of this in mind we're going to review the key hedge fund action regarding The AES Corporation (NYSE:AES).

Hedge fund activity in The AES Corporation (NYSE:AES)

At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in AES a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in The AES Corporation (NYSE:AES), which was worth $174.7 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $72.9 million worth of shares. ValueAct Capital, Two Sigma Advisors, and GLG Partners 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 Axel Capital Management allocated the biggest weight to The AES Corporation (NYSE:AES), around 5.78% of its 13F portfolio. Blackstart Capital is also relatively very bullish on the stock, setting aside 4.58 percent of its 13F equity portfolio to AES.

Because The AES Corporation (NYSE:AES) has faced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there exists a select few money managers that slashed their full holdings heading into Q4. Interestingly, Ken Griffin's Citadel Investment Group dumped the largest investment of the "upper crust" of funds tracked by Insider Monkey, totaling close to $8.2 million in stock. Matthew Drapkin and Steven R. Becker's fund, Becker Drapkin Management, also dumped its stock, about $4.3 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q4.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as The AES Corporation (NYSE:AES) but similarly valued. These stocks are Everest Re Group Ltd (NYSE:RE), Varian Medical Systems, Inc. (NYSE:VAR), Tractor Supply Company (NASDAQ:TSCO), and TechnipFMC plc (NYSE:FTI). This group of stocks' market valuations are closest to AES's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RE,21,667060,-2 VAR,27,381320,2 TSCO,36,639730,1 FTI,31,767800,6 Average,28.75,613978,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $614 million. That figure was $441 million in AES's case. Tractor Supply Company (NASDAQ:TSCO) is the most popular stock in this table. On the other hand Everest Re Group Ltd (NYSE:RE) is the least popular one with only 21 bullish hedge fund positions. The AES Corporation (NYSE:AES) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on AES as the stock returned 42.1% in 2019 and outclassed the market by an even larger margin. 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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