Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 34.7% compared to 26.2%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Is Dominion Energy, Inc. (NYSE:D) going to take off soon? Investors who are in the know are taking a bullish view. The number of bullish hedge fund positions moved up by 3 in recent months. Our calculations also showed that D isn't among the 30 most popular stocks among hedge funds.
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_340081" align="aligncenter" width="450"] Phill Gross of Adage Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to check out the latest hedge fund action encompassing Dominion Energy, Inc. (NYSE:D).
Hedge fund activity in Dominion Energy, Inc. (NYSE:D)
At the end of the third quarter, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 27 hedge funds with a bullish position in D a year ago. With the smart money's sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in Dominion Energy, Inc. (NYSE:D) was held by Zimmer Partners, which reported holding $171.8 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $114.9 million position. Other investors bullish on the company included Adage Capital Management, Electron Capital Partners, and AQR Capital Management. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Dominion Energy, Inc. (NYSE:D), around 11.59% of its portfolio. Shelter Harbor Advisors is also relatively very bullish on the stock, designating 7.57 percent of its 13F equity portfolio to D.
Consequently, specific money managers have jumped into Dominion Energy, Inc. (NYSE:D) headfirst. Soros Fund Management, managed by George Soros, created the biggest position in Dominion Energy, Inc. (NYSE:D). Soros Fund Management had $12.2 million invested in the company at the end of the quarter. Charles Davidson and Joseph Jacobs's Wexford Capital also made a $11.6 million investment in the stock during the quarter. The other funds with brand new D positions are Alec Litowitz and Ross Laser's Magnetar Capital, Michael Gelband's ExodusPoint Capital, and Franklin Parlamis's Aequim Alternative Investments.
Let's go over hedge fund activity in other stocks similar to Dominion Energy, Inc. (NYSE:D). We will take a look at Canadian National Railway Company (NYSE:CNI), The Southern Company (NYSE:SO), Northrop Grumman Corporation (NYSE:NOC), and ConocoPhillips Company (NYSE:COP). All of these stocks' market caps match D's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNI,27,2084810,-1 SO,31,1190703,9 NOC,43,843083,6 COP,65,2901952,8 Average,41.5,1755137,5.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $1755 million. That figure was $767 million in D's case. ConocoPhillips Company (NYSE:COP) is the most popular stock in this table. On the other hand Canadian National Railway Company (NYSE:CNI) is the least popular one with only 27 bullish hedge fund positions. Dominion Energy, Inc. (NYSE:D) 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 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately D wasn't nearly as popular as these 20 stocks and hedge funds that were betting on D were disappointed as the stock returned 2.7% during the fourth quarter (through 11/22) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.