U.S. markets close in 57 minutes

Huaneng Power International Inc (HNP): Are Hedge Funds Right About This Stock?

Asma UL Husna

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded Huaneng Power International Inc (NYSE:HNP) based on those filings.

Huaneng Power International Inc (NYSE:HNP) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 3 hedge funds' portfolios at the end of March. At the end of this article we will also compare HNP to other stocks including Commerce Bancshares, Inc. (NASDAQ:CBSH), Penumbra Inc (NYSE:PEN), and Federal Realty Investment Trust (NYSE:FRT) to get a better sense of its popularity. 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 44 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.

[caption id="attachment_27480" align="aligncenter" width="397"] Israel Englander of Millennium Management[/caption]

Izzy Englander of MILLENNIUM MANAGEMENT

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, legendary investor Bill Miller told investors to sell 7 extremely popular recession stocks last month. So, we went through his list and recommended another stock with 100% upside potential instead. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we're going to view the fresh hedge fund action encompassing Huaneng Power International Inc (NYSE:HNP).

How are hedge funds trading Huaneng Power International Inc (NYSE:HNP)?

Heading into the second quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 3 hedge funds with a bullish position in HNP a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Huaneng Power International Inc (NYSE:HNP) was held by Renaissance Technologies, which reported holding $1.9 million worth of stock at the end of September. It was followed by Millennium Management with a $0.3 million position. The only other hedge fund that is bullish on the company was Arrowstreet Capital.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Arrowstreet Capital).

Let's go over hedge fund activity in other stocks similar to Huaneng Power International Inc (NYSE:HNP). We will take a look at Commerce Bancshares, Inc. (NASDAQ:CBSH), Penumbra Inc (NYSE:PEN), Federal Realty Investment Trust (NYSE:FRT), and AMERCO (NASDAQ:UHAL). This group of stocks' market caps are similar to HNP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBSH,15,44791,5 PEN,20,247173,-10 FRT,24,78227,2 UHAL,15,318275,-2 Average,18.5,172117,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $172 million. That figure was $2 million in HNP's case. Federal Realty Investment Trust (NYSE:FRT) is the most popular stock in this table. On the other hand Commerce Bancshares, Inc. (NASDAQ:CBSH) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Huaneng Power International Inc (NYSE:HNP) is even less popular than CBSH. Hedge funds dodged a bullet by taking a bearish stance towards HNP. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 7.9% in 2020 through May 22nd but managed to beat the market by 15.6 percentage points. Unfortunately HNP wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); HNP investors were disappointed as the stock returned 0% during the second quarter (through May 22nd) 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 so far in 2020.

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

Related Content