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Trigger Happy Hedge Funds Sold FirstEnergy Corp. (FE) A Bit Too Early

Nina Todic

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in FirstEnergy Corp. (NYSE:FE)? The smart money sentiment can provide an answer to this question.

FirstEnergy Corp. (NYSE:FE) investors should pay attention to a decrease in hedge fund sentiment in recent months. Our calculations also showed that FE isn't among the 30 most popular stocks among hedge funds. We should note that hedge fund sentiment towards FE was at its all time high at the end of March.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

[caption id="attachment_728376" align="aligncenter" width="473"] Jonathan Barrett of Luminus Management[/caption]

Jonathan Barrett Luminus Management

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a glance at the latest hedge fund action encompassing FirstEnergy Corp. (NYSE:FE).

How are hedge funds trading FirstEnergy Corp. (NYSE:FE)?

Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. By comparison, 28 hedge funds held shares or bullish call options in FE a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with FE Positions

The largest stake in FirstEnergy Corp. (NYSE:FE) was held by Zimmer Partners, which reported holding $1110.3 million worth of stock at the end of March. It was followed by Elliott Management with a $1072.1 million position. Other investors bullish on the company included Renaissance Technologies, Luminus Management, and Adage Capital Management.

Seeing as FirstEnergy Corp. (NYSE:FE) has experienced a decline in interest from hedge fund managers, it's easy to see that there was a specific group of hedge funds that slashed their entire stakes in the second quarter. At the top of the heap, Peter J. Hark's Shelter Harbor Advisors said goodbye to the biggest position of the 750 funds followed by Insider Monkey, comprising about $14.6 million in stock, and Charles Davidson and Joseph Jacobs's Wexford Capital was right behind this move, as the fund said goodbye to about $5.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 7 funds in the second quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as FirstEnergy Corp. (NYSE:FE) but similarly valued. These stocks are Total System Services, Inc. (NYSE:TSS), Fox Corporation (NASDAQ:FOXA), Fox Corporation (NASDAQ:FOX), and TELUS Corporation (NYSE:TU). All of these stocks' market caps are similar to FE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSS,45,1236790,5 FOXA,60,3322026,-11 FOX,30,1020193,-10 TU,13,327747,0 Average,37,1476689,-4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $1477 million. That figure was $3499 million in FE's case. Fox Corporation (NASDAQ:FOXA) is the most popular stock in this table. On the other hand TELUS Corporation (NYSE:TU) is the least popular one with only 13 bullish hedge fund positions. FirstEnergy Corp. (NYSE:FE) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks (see the video below) among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on FE as the stock returned 13.7% during the same time frame and outperformed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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