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Were Hedge Funds Right About Souring On Cheniere Energy, Inc. (LNG)?

Nina Todic

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. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Cheniere Energy, Inc. (NYSE:LNG) to find out whether it was one of their high conviction long-term ideas.

Cheniere Energy, Inc. (NYSE:LNG) was in 40 hedge funds' portfolios at the end of the third quarter of 2019. LNG investors should be aware of a decrease in support from the world's most elite money managers of late. There were 43 hedge funds in our database with LNG holdings at the end of the previous quarter. Our calculations also showed that LNG 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26423" align="aligncenter" width="482"] Seth Klarman of Baupost Group[/caption]

BAUPOST GROUP Seth Klarman

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the fresh hedge fund action regarding Cheniere Energy, Inc. (NYSE:LNG).

What have hedge funds been doing with Cheniere Energy, Inc. (NYSE:LNG)?

At Q3's end, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. On the other hand, there were a total of 42 hedge funds with a bullish position in LNG 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 LNG Positions

The largest stake in Cheniere Energy, Inc. (NYSE:LNG) was held by Icahn Capital, which reported holding $1235 million worth of stock at the end of September. It was followed by Kensico Capital with a $682.6 million position. Other investors bullish on the company included Baupost Group, Steadfast Capital Management, and Anchorage Advisors. In terms of the portfolio weights assigned to each position Farmstead Capital Management allocated the biggest weight to Cheniere Energy, Inc. (NYSE:LNG), around 25.37% of its portfolio. Anchorage Advisors is also relatively very bullish on the stock, designating 14.1 percent of its 13F equity portfolio to LNG.

Judging by the fact that Cheniere Energy, Inc. (NYSE:LNG) has experienced bearish sentiment from hedge fund managers, it's safe to say that there was a specific group of hedgies who sold off their entire stakes in the third quarter. Interestingly, Matthew Knauer and Mina Faltas's Nokota Management dropped the largest investment of the 750 funds tracked by Insider Monkey, valued at an estimated $68.5 million in stock, and Jorge Paulo Lemann's 3G Capital was right behind this move, as the fund dumped about $47 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 3 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to Cheniere Energy, Inc. (NYSE:LNG). These stocks are Shinhan Financial Group Co., Ltd. (NYSE:SHG), Avangrid, Inc. (NYSE:AGR), Garmin Ltd. (NASDAQ:GRMN), and Incyte Corporation (NASDAQ:INCY). This group of stocks' market values resemble LNG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SHG,4,8676,-1 AGR,14,361586,2 GRMN,26,504128,-6 INCY,32,3214518,-4 Average,19,1022227,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $1022 million. That figure was $3860 million in LNG's case. Incyte Corporation (NASDAQ:INCY) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Cheniere Energy, Inc. (NYSE:LNG) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately LNG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LNG were disappointed as the stock returned -3.5% during the fourth quarter (through 11/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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