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Were Hedge Funds Right About Souring On NRG Energy Inc (NRG)?

Asma UL Husna

Hedge funds are not perfect. They have their bad picks just like everyone else. Facebook, a stock hedge funds have loved, lost nearly 40% of its value at one point in 2018. Although hedge funds are not perfect, their consensus picks do deliver solid returns, however. Our data show the top 15 S&P 500 stocks among hedge funds at the end of December 2018 yielded an average return of 19.7% year-to-date, vs. a gain of 13.1% for the S&P 500 Index. Because hedge funds have a lot of resources and their consensus picks do well, we pay attention to what they think. In this article, we analyze what the elite funds think of NRG Energy Inc (NYSE:NRG).

Is NRG Energy Inc (NYSE:NRG) undervalued? Money managers are getting less bullish. The number of bullish hedge fund positions were cut by 1 recently. Our calculations also showed that NRG isn't among the 30 most popular stocks among hedge funds. NRG was in 49 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 50 hedge funds in our database with NRG holdings at the end of the previous quarter.

If you'd ask most traders, hedge funds are viewed as worthless, outdated investment vehicles of yesteryear. While there are over 8000 funds trading at present, Our experts choose to focus on the aristocrats of this group, about 750 funds. These money managers manage the lion's share of the smart money's total asset base, and by monitoring their unrivaled picks, Insider Monkey has come up with various investment strategies that have historically outpaced the market. Insider Monkey's flagship hedge fund strategy outperformed the S&P 500 index by nearly 5 percentage points annually since its inception in May 2014 through early November 2018. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 27.5% since February 2017 (through March 12th) even though the market was up nearly 25% during the same period. We just shared a list of 6 short targets in our latest quarterly update and they are already down an average of 6% in less than a month.

Bruce Kovner, Caxton Associates LP

We're going to take a glance at the new hedge fund action surrounding NRG Energy Inc (NYSE:NRG).

Hedge fund activity in NRG Energy Inc (NYSE:NRG)

At Q4's end, a total of 49 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NRG over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

NRG_mar2019

Among these funds, Brahman Capital held the most valuable stake in NRG Energy Inc (NYSE:NRG), which was worth $323.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $257.1 million worth of shares. Moreover, Steadfast Capital Management, Two Sigma Advisors, and Millennium Management were also bullish on NRG Energy Inc (NYSE:NRG), allocating a large percentage of their portfolios to this stock.

Because NRG Energy Inc (NYSE:NRG) has witnessed falling interest from hedge fund managers, we can see that there exists a select few fund managers who sold off their full holdings by the end of the third quarter. Intriguingly, Jos Shaver's Electron Capital Partners dropped the biggest investment of the "upper crust" of funds followed by Insider Monkey, valued at close to $53.7 million in stock. Matthew Knauer and Mina Faltas's fund, Nokota Management, also dropped its stock, about $38.4 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to NRG Energy Inc (NYSE:NRG). These stocks are Advance Auto Parts, Inc. (NYSE:AAP), Extra Space Storage, Inc. (NYSE:EXR), Godaddy Inc (NYSE:GDDY), and Quest Diagnostics Incorporated (NYSE:DGX). This group of stocks' market valuations are similar to NRG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AAP,51,1908548,13 EXR,24,211374,2 GDDY,43,2780202,-5 DGX,26,583622,-12 Average,36,1370937,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $1371 million. That figure was $2016 million in NRG's case. Advance Auto Parts, Inc. (NYSE:AAP) is the most popular stock in this table. On the other hand Extra Space Storage, Inc. (NYSE:EXR) is the least popular one with only 24 bullish hedge fund positions. NRG Energy Inc (NYSE:NRG) is not the most popular stock in this group but hedge fund interest is still above average. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately NRG wasn't in this group. Hedge funds that bet on NRG were disappointed as the stock returned 10.9% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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