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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards NRG Energy Inc (NYSE:NRG) to find out whether there were any major changes in hedge funds' views.
Is NRG stock a buy? Hedge funds were turning less bullish. The number of long hedge fund positions were trimmed by 1 recently. NRG Energy Inc (NYSE:NRG) was in 31 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 50. Our calculations also showed that NRG isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Richard S. Pzena of Pzena Investment Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we heard that billionaire Peter Thiel is backing this biotech stock. So, we are taking a closer look at this space. We go through lists like the 10 best biotech stocks under $10 to identify the next stock with 10x upside potential. 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. Keeping this in mind let's view the key hedge fund action regarding NRG Energy Inc (NYSE:NRG).
Do Hedge Funds Think NRG Is A Good Stock To Buy Now?
Heading into the first quarter of 2021, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NRG over the last 22 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Among these funds, Pzena Investment Management held the most valuable stake in NRG Energy Inc (NYSE:NRG), which was worth $344.5 million at the end of the fourth quarter. On the second spot was Steadfast Capital Management which amassed $265 million worth of shares. Lyrical Asset Management, Permian Investment Partners, and D E Shaw 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 Permian Investment Partners allocated the biggest weight to NRG Energy Inc (NYSE:NRG), around 19.01% of its 13F portfolio. SAYA Management is also relatively very bullish on the stock, dishing out 8.51 percent of its 13F equity portfolio to NRG.
Due to the fact that NRG Energy Inc (NYSE:NRG) has faced declining sentiment from the smart money, logic holds that there exists a select few hedge funds who sold off their full holdings by the end of the fourth quarter. It's worth mentioning that Mitch Kuflik and Rob Sobel's Brahman Capital dropped the biggest stake of the 750 funds tracked by Insider Monkey, valued at close to $58.3 million in stock. Jonathan Barrett and Paul Segal's fund, Luminus Management, also dumped its stock, about $40.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 1 funds by the end of the fourth quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as NRG Energy Inc (NYSE:NRG) but similarly valued. These stocks are Bunge Limited (NYSE:BG), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), RH (NYSE:RH), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), Shaw Communications Inc (NYSE:SJR), The Western Union Company (NYSE:WU), and Flex Ltd. (NASDAQ:FLEX). This group of stocks' market caps are closest to NRG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BG,51,936635,10 RARE,26,609331,6 RH,42,1925993,2 KOF,6,384456,0 SJR,19,143455,6 WU,29,491046,-7 FLEX,44,1373056,17 Average,31,837710,4.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $838 million. That figure was $1465 million in NRG's case. Bunge Limited (NYSE:BG) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 6 bullish hedge fund positions. NRG Energy Inc (NYSE:NRG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NRG is 50.4. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.2% in 2021 through April 12th and surpassed the market again by 1.5 percentage points. Unfortunately NRG wasn't nearly as popular as these 30 stocks (hedge fund sentiment was quite bearish); NRG investors were disappointed as the stock returned 3.5% since the end of December (through 4/12) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 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.