With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was The Southern Company (NYSE:SO).
Is The Southern Company (NYSE:SO) a first-rate investment today? The smart money is getting more bullish. The number of long hedge fund positions rose by 9 in recent months. Our calculations also showed that SO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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_255014" align="aligncenter" width="450"] Clint Carlson of Carlson Capital[/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. Let's take a look at the latest hedge fund action regarding The Southern Company (NYSE:SO).
Hedge fund activity in The Southern Company (NYSE:SO)
At Q3's end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 41% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SO over the last 17 quarters. So, let's check out 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 Southern Company (NYSE:SO), which was worth $533.1 million at the end of the third quarter. On the second spot was Zimmer Partners which amassed $167 million worth of shares. Two Sigma Advisors, AQR Capital Management, and Point72 Asset Management 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 Blackstart Capital allocated the biggest weight to The Southern Company (NYSE:SO), around 6.82% of its portfolio. Centenus Global Management is also relatively very bullish on the stock, designating 2.57 percent of its 13F equity portfolio to SO.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, created the most valuable position in The Southern Company (NYSE:SO). Point72 Asset Management had $53.9 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also made a $37.1 million investment in the stock during the quarter. The other funds with brand new SO positions are Brian Olson, Baehyun Sung, and Jamie Waters's Blackstart Capital, Daniel S. Och (founder)'s Sculptor Capital, and Donald Sussman's Paloma Partners.
Let's also examine hedge fund activity in other stocks similar to The Southern Company (NYSE:SO). These stocks are Northrop Grumman Corporation (NYSE:NOC), ConocoPhillips Company (NYSE:COP), Colgate-Palmolive Company (NYSE:CL), and Equinor ASA (NYSE:EQNR). All of these stocks' market caps match SO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NOC,43,843083,6 COP,65,2901952,8 CL,42,2061209,0 EQNR,14,392283,1 Average,41,1549632,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $1550 million. That figure was $1191 million in SO's case. ConocoPhillips Company (NYSE:COP) is the most popular stock in this table. On the other hand Equinor ASA (NYSE:EQNR) is the least popular one with only 14 bullish hedge fund positions. The Southern Company (NYSE:SO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SO investors were disappointed as the stock returned 1.4% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.