We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about TransAlta Corporation (NYSE:TAC).
Is TransAlta Corporation (NYSE:TAC) the right pick for your portfolio? Money managers are in an optimistic mood. The number of long hedge fund bets improved by 3 recently. Our calculations also showed that TAC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). TAC was in 10 hedge funds' portfolios at the end of December. There were 7 hedge funds in our database with TAC holdings at the end of the previous quarter.
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 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 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.
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's view the fresh hedge fund action regarding TransAlta Corporation (NYSE:TAC).
Hedge fund activity in TransAlta Corporation (NYSE:TAC)
Heading into the first quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from one quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in TAC 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 TransAlta Corporation (NYSE:TAC), which was worth $21 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $12.7 million worth of shares. Millennium Management, Marshall Wace LLP, and Citadel Investment Group 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 Signition LP allocated the biggest weight to TransAlta Corporation (NYSE:TAC), around 0.44% of its 13F portfolio. Waratah Capital Advisors is also relatively very bullish on the stock, earmarking 0.12 percent of its 13F equity portfolio to TAC.
Now, specific money managers have jumped into TransAlta Corporation (NYSE:TAC) headfirst. Fairfax Financial Holdings, managed by Prem Watsa, established the most valuable position in TransAlta Corporation (NYSE:TAC). Fairfax Financial Holdings had $1.5 million invested in the company at the end of the quarter. Brad Dunkley and Blair Levinsky's Waratah Capital Advisors also initiated a $1.1 million position during the quarter. The other funds with new positions in the stock are John Overdeck and David Siegel's Two Sigma Advisors and George Zweig, Shane Haas and Ravi Chander's Signition LP.
Let's check out hedge fund activity in other stocks similar to TransAlta Corporation (NYSE:TAC). These stocks are National Storage Affiliates Trust (NYSE:NSA), Callaway Golf Company (NYSE:ELY), Walker & Dunlop Inc. (NYSE:WD), and Bank of N.T. Butterfield & Son Limited (The) (NYSE:NTB). This group of stocks' market valuations resemble TAC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NSA,11,82641,-6 ELY,20,269683,0 WD,25,101505,9 NTB,17,149206,2 Average,18.25,150759,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $47 million in TAC's case. Walker & Dunlop Inc. (NYSE:WD) is the most popular stock in this table. On the other hand National Storage Affiliates Trust (NYSE:NSA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks TransAlta Corporation (NYSE:TAC) is even less popular than NSA. Hedge funds dodged a bullet by taking a bearish stance towards TAC. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately TAC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TAC investors were disappointed as the stock returned -25.6% during the same time period 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 most of these stocks already outperformed the market so far in 2020. 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.