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Did Hedge Funds Make The Right Call On American Electric Power Company, Inc. (AEP) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards American Electric Power Company, Inc. (NYSE:AEP) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is American Electric Power Company, Inc. (NYSE:AEP) an attractive investment right now? Investors who are in the know were taking a bullish view. The number of bullish hedge fund positions increased by 4 recently. Our calculations also showed that AEP isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). AEP was in 38 hedge funds’ portfolios at the end of the first quarter of 2020. There were 34 hedge funds in our database with AEP holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to view the latest hedge fund action encompassing American Electric Power Company, Inc. (NYSE:AEP).

Hedge fund activity in American Electric Power Company, Inc. (NYSE:AEP)

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AEP over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AEP A Good Stock To Buy?

Among these funds, Renaissance Technologies held the most valuable stake in American Electric Power Company, Inc. (NYSE:AEP), which was worth $442.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $120.1 million worth of shares. Citadel Investment Group, D E Shaw, and Zimmer Partners 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 Ecofin Ltd allocated the biggest weight to American Electric Power Company, Inc. (NYSE:AEP), around 2.79% of its 13F portfolio. Wexford Capital is also relatively very bullish on the stock, setting aside 1.88 percent of its 13F equity portfolio to AEP.

Consequently, key hedge funds were breaking ground themselves. Zimmer Partners, managed by Stuart J. Zimmer, established the most valuable position in American Electric Power Company, Inc. (NYSE:AEP). Zimmer Partners had $75.9 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also made a $53.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Zach Schreiber’s Point State Capital, Andrew Weiss’s Weiss Asset Management, and Charles Davidson and Joseph Jacobs’s Wexford Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as American Electric Power Company, Inc. (NYSE:AEP) but similarly valued. We will take a look at Waste Management, Inc. (NYSE:WM), Edwards Lifesciences Corporation (NYSE:EW), L3Harris Technologies, Inc. (NASDAQ:LHX), and Banco Santander, S.A. (NYSE:SAN). All of these stocks’ market caps are closest to AEP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WM 40 2563267 8
EW 49 1405375 4
LHX 43 1593570 -5
SAN 18 348505 -3
Average 37.5 1477679 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $1478 million. That figure was $1071 million in AEP’s case. Edwards Lifesciences Corporation (NYSE:EW) is the most popular stock in this table. On the other hand Banco Santander, S.A. (NYSE:SAN) is the least popular one with only 18 bullish hedge fund positions. American Electric Power Company, Inc. (NYSE:AEP) 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 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately AEP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AEP were disappointed as the stock returned 0.5% during the same time period 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.