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Were These Hedge Funds Right About Piling Into Edison International (EIX)?

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Reymerlyn Martin
·6 min read
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While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Edison International (NYSE:EIX).

Edison International (NYSE:EIX) has experienced an increase in enthusiasm from smart money of late. Edison International (NYSE:EIX) was in 37 hedge funds' portfolios at the end of June. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that EIX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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' 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 58 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.

Steven Tananbaum - GoldenTree Asset Management
Steven Tananbaum - GoldenTree Asset Management

Steven Tananbaum of GoldenTree Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 to get excerpts of these letters in your inbox. With all of this in mind let's take a peek at the key hedge fund action surrounding Edison International (NYSE:EIX).

How are hedge funds trading Edison International (NYSE:EIX)?

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 28% from the first quarter of 2020. By comparison, 33 hedge funds held shares or bullish call options in EIX 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.

Among these funds, Zimmer Partners held the most valuable stake in Edison International (NYSE:EIX), which was worth $541.7 million at the end of the third quarter. On the second spot was Pzena Investment Management which amassed $280.4 million worth of shares. Canyon Capital Advisors, Fir Tree, and Adage Capital 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 Covalis Capital allocated the biggest weight to Edison International (NYSE:EIX), around 30.05% of its 13F portfolio. Inherent Group is also relatively very bullish on the stock, setting aside 20.12 percent of its 13F equity portfolio to EIX.

As aggregate interest increased, some big names have been driving this bullishness. Fir Tree, managed by Jeffrey Tannenbaum, initiated the biggest position in Edison International (NYSE:EIX). Fir Tree had $137.7 million invested in the company at the end of the quarter. Steven Tananbaum's GoldenTree Asset Management also made a $86.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Zilvinas Mecelis's Covalis Capital, Zach Schreiber's Point State Capital, and Jos Shaver's Electron Capital Partners.

Let's now review hedge fund activity in other stocks similar to Edison International (NYSE:EIX). These stocks are Wheaton Precious Metals Corp. (NYSE:WPM), Corning Incorporated (NYSE:GLW), TD Ameritrade Holding Corp. (NASDAQ:AMTD), Deutsche Bank AG (NYSE:DB), Nasdaq, Inc. (NASDAQ:NDAQ), Copart, Inc. (NASDAQ:CPRT), and Banco Santander (Brasil) SA (NYSE:BSBR). This group of stocks' market caps match EIX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WPM,21,767509,-4 GLW,28,147576,-2 AMTD,47,1172699,1 DB,11,1266439,-1 NDAQ,25,153170,-1 CPRT,60,826695,12 BSBR,10,18916,2 Average,28.9,621858,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.9 hedge funds with bullish positions and the average amount invested in these stocks was $622 million. That figure was $1671 million in EIX's case. Copart, Inc. (NASDAQ:CPRT) is the most popular stock in this table. On the other hand Banco Santander (Brasil) SA (NYSE:BSBR) is the least popular one with only 10 bullish hedge fund positions. Edison International (NYSE:EIX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EIX is 67. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately EIX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on EIX were disappointed as the stock returned 5.7% since the end of June (through 10/30) 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 many of these stocks already outperformed the market so far this year.

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

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