5 of the Smart Money’s Brightest Utility Plays: NorthWestern Corp (NWE), PG&E Corporation (PCG)

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Financial news has focused on many sectors and themes over the past several years:  big energy companies, commodities, a never ending attention on Apple, Google, Amazon, and Facebook, cloud computing, and even Buffett buying a railroad. One of the most unheralded stories over the same period has been the continual, nearly unbreakable, strength in the utility sector. Looking at a three-year chart of the Dow Jones Utility Index produces a nearly perfect low-to-high diagonal, paralleling the S&P 500’s move, but less susceptible to serious selloff.  Add in the high dividends received by shareholders of these stocks and shareholders have received a nifty risk/return scenario.

What may not be well appreciated is the degree to which the hedge fund community has soaked up utility shares. It’s always important to track the smart money’s sentiment; learn how retail investors have historically beaten the market using Insider Monkey’s strategies.

Below, we will take a quick look at five utilities to gain a better appreciation of hedge fund interest in these issues. The breadth of hedge funds taking the long side of the utility trade is impressive.  Some funds appear across multiple issues while others take a single large position in one issue.  Whatever the specific strategy, the message appears clear: many of the most elite hedge funds have a penchant for utility stocks.

Millennium Management, Catapult Capital Management

As most investors understand, because of their high dividend yields, utility stocks tend to trade with the bond market.  Everything else being equal, a strong bond market and low bond yields attract investors into the sector. The conclusion here is a simple one: the hedge fund community believes in being on the right side of the low interest rate environment trade, and the continual, large scale buying in the utility space suggests they believe it will not be coming to an end anytime soon.

NorthWestern Corp (NYSE:NWE) provides electric and natural gas services to the U.S. states of Montana, South Dakota, and Nebraska.  Currently, shares offer a dividend yield of 3.9%.  Over the past 12 months Israel Englander’s Millennium Management (see Englander’s equity portfolio) fund built a position of 45,791 shares to 570,153 shares as of the latest fourth quarter 13F filing period.  Adage Capital Management, meanwhile, initiated a 1million-share position in the second half of 2012, and AQR Capital held an approximate 375K-share position throughout the period. NorthWestern Corp (NYSE:NWE) is up more than 13% year-to-date, and Wall Street expects another 4-5% upside from current levels.

PG&E Corporation (NYSE:PCG) is an electric and gas utility serving central and northern California; its dividend yields 4.2%. Levin Capital Partners held a 142K-share position in its May 2012 filing. The most current filing unveiled a whopping 2.8 million-share position—a massive boost for the firm managed by John A. Levin. D.E. Shaw grew a 349K-share position reported in its Q1 2012 filing to 1.6 million shares by the end of 2012, and Stanley Drunkenmiller’s Duquesne Capital reported a new position of 619K shares in its current filing. PG&E Corporation (NYSE:PCG) has already popped close to 8% year-to-date, and trades below 14 times forward earnings, good for 20th lowest out of the 123-stock utilities sector.

American Electric Power Company (NYSE:AEP) is a well-known provider of electricity to wide swath of central U.S. states, and the stock yields 4%.  Per Insider Monkey’s 13F filing database, a solid group of buyers again appears: Adage Capital, Levin Capital, AQR, Millennium, Carlson Capital, Seminole Capital, and Renaissance Technologies, among others. The first five funds all reported minimum 1 million-plus share positions in their latest fourth quarter filings, and American Electric has already gained nearly 12% year-to-date.

Who’s the best of the rest?

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