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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Public Service Enterprise Group Incorporated (NYSE:PEG) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Public Service Enterprise Group Incorporated (NYSE:PEG) the right investment to pursue these days? Investors who are in the know were taking a bearish view. The number of long hedge fund bets fell by 3 lately. Public Service Enterprise Group Incorporated (NYSE:PEG) was in 31 hedge funds' portfolios at the end of June. The all time high for this statistics is 34. Our calculations also showed that PEG 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.
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 S&P 500 ETFs by 58 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.
Cliff Asness of AQR Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let's take a look at the fresh hedge fund action surrounding Public Service Enterprise Group Incorporated (NYSE:PEG).
What have hedge funds been doing with Public Service Enterprise Group Incorporated (NYSE:PEG)?
At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PEG over the last 20 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Public Service Enterprise Group Incorporated (NYSE:PEG), with a stake worth $123 million reported as of the end of September. Trailing AQR Capital Management was Two Sigma Advisors, which amassed a stake valued at $116.7 million. Zimmer Partners, Adage Capital Management, and Renaissance Technologies 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 Public Service Enterprise Group Incorporated (NYSE:PEG), around 4.58% of its 13F portfolio. Yaupon Capital is also relatively very bullish on the stock, setting aside 3.69 percent of its 13F equity portfolio to PEG.
Due to the fact that Public Service Enterprise Group Incorporated (NYSE:PEG) has experienced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few funds that decided to sell off their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the biggest position of all the hedgies monitored by Insider Monkey, comprising about $36.5 million in stock, and Clint Carlson's Carlson Capital was right behind this move, as the fund dumped about $26.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Public Service Enterprise Group Incorporated (NYSE:PEG) but similarly valued. We will take a look at Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Credit Suisse Group AG (NYSE:CS), Nokia Corporation (NYSE:NOK), Zimmer Biomet Holdings Inc (NYSE:ZBH), Rockwell Automation Inc. (NYSE:ROK), Waste Connections, Inc. (NYSE:WCN), and Telefonica S.A. (NYSE:TEF). This group of stocks' market valuations are closest to PEG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALXN,57,3577628,1 CS,14,134420,3 NOK,26,218711,3 ZBH,62,752893,11 ROK,50,546946,13 WCN,39,720610,6 TEF,6,9842,-1 Average,36.3,851579,5.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36.3 hedge funds with bullish positions and the average amount invested in these stocks was $852 million. That figure was $649 million in PEG's case. Zimmer Biomet Holdings Inc (NYSE:ZBH) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 6 bullish hedge fund positions. Public Service Enterprise Group Incorporated (NYSE:PEG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PEG is 51.7. 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. 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 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately PEG wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PEG investors were disappointed as the stock returned 7.8% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.