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Do These Hedge Funds Regret Selling American Electric Power Company, Inc. (AEP)?

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·6 min read
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  • AEP

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of American Electric Power Company, Inc. (NYSE:AEP).

American Electric Power Company, Inc. (NYSE:AEP) shareholders have witnessed a decrease in enthusiasm from smart money lately. American Electric Power Company, Inc. (NYSE:AEP) was in 34 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. Our calculations also showed that AEP isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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.

Och-Ziff Capital Management
Och-Ziff Capital Management

Daniel Och, Founder of OZ Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let's take a peek at the recent hedge fund action surrounding American Electric Power Company, Inc. (NYSE:AEP).

What does smart money think about American Electric Power Company, Inc. (NYSE:AEP)?

Heading into the third quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in AEP a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Is AEP A Good Stock To Buy?
Is AEP A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of American Electric Power Company, Inc. (NYSE:AEP), with a stake worth $198.6 million reported as of the end of June. Trailing Renaissance Technologies was Zimmer Partners, which amassed a stake valued at $142.7 million. D E Shaw, Millennium 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 Ecofin Ltd allocated the biggest weight to American Electric Power Company, Inc. (NYSE:AEP), around 2.56% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, dishing out 1.93 percent of its 13F equity portfolio to AEP.

Because American Electric Power Company, Inc. (NYSE:AEP) has witnessed declining sentiment from hedge fund managers, it's easy to see that there is a sect of fund managers who sold off their full holdings in the second quarter. It's worth mentioning that Zach Schreiber's Point State Capital cut the biggest stake of the "upper crust" of funds tracked by Insider Monkey, comprising about $14.3 million in stock, and Charles Davidson and Joseph Jacobs's Wexford Capital was right behind this move, as the fund cut about $5.1 million worth. These transactions are important to note, as total hedge fund interest fell by 4 funds in the second quarter.

Let's now take a look at hedge fund activity in other stocks similar to American Electric Power Company, Inc. (NYSE:AEP). These stocks are DuPont de Nemours Inc (NYSE:DD), The Kraft Heinz Company (NASDAQ:KHC), Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), DexCom, Inc. (NASDAQ:DXCM), Digital Realty Trust, Inc. (NYSE:DLR), Electronic Arts Inc. (NASDAQ:EA), and BCE Inc. (NYSE:BCE). This group of stocks' market values resemble AEP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DD,64,3509743,10 KHC,35,10727266,-4 SMFG,10,101369,0 DXCM,55,1710751,-3 DLR,26,274088,-3 EA,67,1988616,-6 BCE,10,176362,-3 Average,38.1,2641171,-1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.1 hedge funds with bullish positions and the average amount invested in these stocks was $2641 million. That figure was $754 million in AEP's case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) is the least popular one with only 10 bullish hedge fund positions. American Electric Power Company, Inc. (NYSE:AEP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for AEP is 48.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on AEP as the stock returned 13.9% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.

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