"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards MGE Energy, Inc. (NASDAQ:MGEE) and see how it was affected.
MGE Energy, Inc. (NASDAQ:MGEE) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 13 hedge funds' portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as GATX Corporation (NYSE:GATX), Cathay General Bancorp (NASDAQ:CATY), and Inphi Corporation (NYSE:IPHI) to gather more data points. Our calculations also showed that MGEE 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.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
[caption id="attachment_746830" align="aligncenter" width="473"] Matthew Hulsizer of PEAK6 Capital[/caption]
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. 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. We also rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the new hedge fund action encompassing MGE Energy, Inc. (NASDAQ:MGEE).
What does smart money think about MGE Energy, Inc. (NASDAQ:MGEE)?
At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in MGEE 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.
According to Insider Monkey's hedge fund database, Renaissance Technologies has the biggest position in MGE Energy, Inc. (NASDAQ:MGEE), worth close to $36.8 million, corresponding to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Millennium Management, led by Israel Englander, holding a $6.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other peers that are bullish include Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Ken Griffin's Citadel Investment Group and Peter Muller's PDT Partners. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to MGE Energy, Inc. (NASDAQ:MGEE), around 0.89% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.09 percent of its 13F equity portfolio to MGEE.
Because MGE Energy, Inc. (NASDAQ:MGEE) has faced a decline in interest from hedge fund managers, it's easy to see that there were a few money managers who sold off their entire stakes heading into Q4. Intriguingly, Paul Tudor Jones's Tudor Investment Corp cut the biggest investment of the "upper crust" of funds followed by Insider Monkey, comprising about $0.8 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also dropped its call options, about $0.4 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to MGE Energy, Inc. (NASDAQ:MGEE). These stocks are GATX Corporation (NYSE:GATX), Cathay General Bancorp (NASDAQ:CATY), Inphi Corporation (NYSE:IPHI), and PotlatchDeltic Corporation (NASDAQ:PCH). This group of stocks' market caps are similar to MGEE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GATX,15,214366,2 CATY,17,43998,5 IPHI,30,388332,4 PCH,19,327723,7 Average,20.25,243605,4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $244 million. That figure was $54 million in MGEE's case. Inphi Corporation (NYSE:IPHI) is the most popular stock in this table. On the other hand GATX Corporation (NYSE:GATX) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks MGE Energy, Inc. (NASDAQ:MGEE) is even less popular than GATX. Hedge funds dodged a bullet by taking a bearish stance towards MGEE. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MGEE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MGEE investors were disappointed as the stock returned -2.5% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.