Did Hedge Funds Make The Right Call On Enphase Energy Inc (ENPH) ?

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 Enphase Energy Inc (NASDAQ:ENPH) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Enphase Energy Inc (NASDAQ:ENPH) was in 35 hedge funds’ portfolios at the end of March. ENPH has seen a decrease in support from the world’s most elite money managers recently. There were 39 hedge funds in our database with ENPH holdings at the end of the previous quarter. Our calculations also showed that ENPH 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).

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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to analyze the new hedge fund action regarding Enphase Energy Inc (NASDAQ:ENPH).

What have hedge funds been doing with Enphase Energy Inc (NASDAQ:ENPH)?

Heading into the second quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in ENPH a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Enphase Energy Inc (NASDAQ:ENPH) was held by D E Shaw, which reported holding $79.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $75.6 million position. Other investors bullish on the company included Park West Asset Management, Citadel Investment Group, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Enphase Energy Inc (NASDAQ:ENPH), around 4.28% of its 13F portfolio. Park West Asset Management is also relatively very bullish on the stock, setting aside 2.65 percent of its 13F equity portfolio to ENPH.

Since Enphase Energy Inc (NASDAQ:ENPH) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of fund managers that elected to cut their positions entirely heading into Q4. Interestingly, Bruce Emery’s Greenvale Capital cut the largest position of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $46.4 million in stock, and Mark Coe’s Intrinsic Edge Capital was right behind this move, as the fund sold off about $19.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 4 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Enphase Energy Inc (NASDAQ:ENPH) but similarly valued. We will take a look at CDK Global Inc (NASDAQ:CDK), ITT Inc. (NYSE:ITT), Lancaster Colony Corporation (NASDAQ:LANC), and HollyFrontier Corporation (NYSE:HFC). All of these stocks’ market caps are closest to ENPH’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $235 million. That figure was $370 million in ENPH’s case. ITT Inc. (NYSE:ITT) is the most popular stock in this table. On the other hand Lancaster Colony Corporation (NASDAQ:LANC) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Enphase Energy Inc (NASDAQ:ENPH) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on ENPH as the stock returned 47.3% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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