Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Quanta Services Inc (NYSE:PWR) changed recently.
Quanta Services Inc (NYSE:PWR) has experienced an increase in enthusiasm from smart money lately. PWR was in 30 hedge funds' portfolios at the end of September. There were 29 hedge funds in our database with PWR holdings at the end of the previous quarter. Our calculations also showed that PWR 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).
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_193032" align="alignnone" width="600"] William Harnisch of Peconic Partners LLC[/caption]
We leave no stone unturned when looking for the next great investment idea. For example 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. 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 take a look at the recent hedge fund action encompassing Quanta Services Inc (NYSE:PWR).
Hedge fund activity in Quanta Services Inc (NYSE:PWR)
Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the second quarter of 2019. By comparison, 34 hedge funds held shares or bullish call options in PWR a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Among these funds, Peconic Partners held the most valuable stake in Quanta Services Inc (NYSE:PWR), which was worth $193.5 million at the end of the third quarter. On the second spot was Lyrical Asset Management which amassed $151.2 million worth of shares. Greenhaven Associates, AQR Capital Management, and D E Shaw 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 Peconic Partners allocated the biggest weight to Quanta Services Inc (NYSE:PWR), around 45.01% of its 13F portfolio. Mountain Lake Investment Management is also relatively very bullish on the stock, designating 9.56 percent of its 13F equity portfolio to PWR.
Consequently, key money managers have been driving this bullishness. Luminus Management, managed by Jonathan Barrett and Paul Segal, assembled the largest position in Quanta Services Inc (NYSE:PWR). Luminus Management had $62.5 million invested in the company at the end of the quarter. Jos Shaver's Electron Capital Partners also made a $48.9 million investment in the stock during the quarter. The following funds were also among the new PWR investors: Richard S. Meisenberg's ACK Asset Management, Louis Bacon's Moore Global Investments, and Ray Dalio's Bridgewater Associates.
Let's now review hedge fund activity in other stocks similar to Quanta Services Inc (NYSE:PWR). We will take a look at Lincoln Electric Holdings, Inc. (NASDAQ:LECO), The Hanover Insurance Group, Inc. (NYSE:THG), Exelixis, Inc. (NASDAQ:EXEL), and Planet Fitness Inc (NYSE:PLNT). This group of stocks' market values resemble PWR's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LECO,16,256053,-6 THG,25,272433,5 EXEL,27,681846,6 PLNT,34,525492,-4 Average,25.5,433956,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $434 million. That figure was $882 million in PWR's case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is the least popular one with only 16 bullish hedge fund positions. Quanta Services Inc (NYSE:PWR) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on PWR, though not to the same extent, as the stock returned 37.5% during 2019 (as of 12/23) and outperformed the market as well. 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.