"October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being '08 and the Crash of '87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the '87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March '09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher." This is how Trapeze Asset Management summarized the recent market moves in its investor letter. 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 one of the stocks hedge funds invest in.
NRG Energy Inc (NYSE:NRG) has seen an increase in hedge fund sentiment lately. NRG was in 50 hedge funds' portfolios at the end of the third quarter of 2018. There were 49 hedge funds in our database with NRG positions at the end of the previous quarter. Our calculations also showed that NRG isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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 market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's view the fresh hedge fund action surrounding NRG Energy Inc (NYSE:NRG).
What have hedge funds been doing with NRG Energy Inc (NYSE:NRG)?
At the end of the third quarter, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from the previous quarter. By comparison, 49 hedge funds held shares or bullish call options in NRG heading into this year. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
More specifically, Brahman Capital was the largest shareholder of NRG Energy Inc (NYSE:NRG), with a stake worth $426.9 million reported as of the end of September. Trailing Brahman Capital was Steadfast Capital Management, which amassed a stake valued at $270.8 million. Adage Capital Management, Renaissance Technologies, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, specific money managers were leading the bulls' herd. Electron Capital Partners, managed by Jos Shaver, assembled the most outsized position in NRG Energy Inc (NYSE:NRG). Electron Capital Partners had $53.7 million invested in the company at the end of the quarter. Robert B. Gillam's McKinley Capital Management also made a $13.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Dmitry Balyasny's Balyasny Asset Management, Daniel Lascano's Lomas Capital Management, and Ray Dalio's Bridgewater Associates.
Let's go over hedge fund activity in other stocks similar to NRG Energy Inc (NYSE:NRG). We will take a look at ANGI Homeservices Inc. (NASDAQ:ANGI), Masco Corporation (NYSE:MAS), Canopy Growth Corporation (NYSE:CGC), and Ally Financial Inc (NYSE:ALLY). This group of stocks' market valuations are closest to NRG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ANGI,19,482435,6 MAS,35,1069198,5 CGC,16,113854,9 ALLY,40,2200238,-6 Average,27.5,966431,3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $966 million. That figure was $2.19 billion in NRG's case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Canopy Growth Corporation (NYSE:CGC) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks NRG Energy Inc (NYSE:NRG) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.
Disclosure: None. This article was originally published at Insider Monkey.