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 37.4% compared to 27.5%, 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.
Pinnacle West Capital Corporation (NYSE:PNW) investors should be aware of an increase in activity from the world's largest hedge funds recently. PNW was in 24 hedge funds' portfolios at the end of September. There were 23 hedge funds in our database with PNW holdings at the end of the previous quarter. Our calculations also showed that PNW 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/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 gander at the latest hedge fund action regarding Pinnacle West Capital Corporation (NYSE:PNW).
How are hedge funds trading Pinnacle West Capital Corporation (NYSE:PNW)?
At Q3's end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PNW over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of Pinnacle West Capital Corporation (NYSE:PNW), with a stake worth $421.2 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $314.5 million. GLG Partners, D E Shaw, and Millennium 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 AQR Capital Management allocated the biggest weight to Pinnacle West Capital Corporation (NYSE:PNW), around 0.5% of its portfolio. Qtron Investments is also relatively very bullish on the stock, designating 0.31 percent of its 13F equity portfolio to PNW.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. D E Shaw, managed by David E. Shaw, assembled the most valuable position in Pinnacle West Capital Corporation (NYSE:PNW). D E Shaw had $24.7 million invested in the company at the end of the quarter. Stuart J. Zimmer's Zimmer Partners also made a $4.1 million investment in the stock during the quarter. The other funds with new positions in the stock are David Harding's Winton Capital Management, Benjamin A. Smith's Laurion Capital Management, and Karim Abbadi and Edward McBride's Centiva Capital.
Let's now review hedge fund activity in other stocks similar to Pinnacle West Capital Corporation (NYSE:PNW). We will take a look at DocuSign, Inc. (NASDAQ:DOCU), AXA Equitable Holdings, Inc. (NYSE:EQH), The AES Corporation (NYSE:AES), and Everest Re Group Ltd (NYSE:RE). This group of stocks' market values are closest to PNW's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOCU,26,673817,0 EQH,21,1062610,-11 AES,24,441027,-3 RE,21,667060,-2 Average,23,711129,-4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $711 million. That figure was $865 million in PNW's case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand AXA Equitable Holdings, Inc. (NYSE:EQH) is the least popular one with only 21 bullish hedge fund positions. Pinnacle West Capital Corporation (NYSE:PNW) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately PNW wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PNW were disappointed as the stock returned -9.2% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.