Did Hedge Funds Make The Right Call On NorthWestern Corporation (NWE) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding NorthWestern Corporation (NYSE:NWE) and determine whether hedge funds had an edge regarding this stock.

NorthWestern Corporation (NYSE:NWE) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Cameco Corporation (NYSE:CCJ), Pan American Silver Corp. (NASDAQ:PAAS), and American States Water Co (NYSE:AWR) to gather more data points. Our calculations also showed that NWE 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a look at the fresh hedge fund action surrounding NorthWestern Corporation (NYSE:NWE).

How have hedgies been trading NorthWestern Corporation (NYSE:NWE)?

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NWE over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in NorthWestern Corporation (NYSE:NWE) was held by AQR Capital Management, which reported holding $61.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $20.6 million position. Other investors bullish on the company included GAMCO Investors, GLG Partners, and Millennium Management. In terms of the portfolio weights assigned to each position Newtyn Management allocated the biggest weight to NorthWestern Corporation (NYSE:NWE), around 1.03% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.66 percent of its 13F equity portfolio to NWE.

Seeing as NorthWestern Corporation (NYSE:NWE) has faced falling interest from the smart money, it’s safe to say that there lies a certain “tier” of money managers that decided to sell off their positions entirely by the end of the first quarter. It’s worth mentioning that Michael Gelband’s ExodusPoint Capital dumped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, comprising about $6.2 million in stock, and Michael Kharitonov and Jon David McAuliffe’s Voleon Capital was right behind this move, as the fund said goodbye to about $1.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as NorthWestern Corporation (NYSE:NWE) but similarly valued. We will take a look at Cameco Corporation (NYSE:CCJ), Pan American Silver Corp. (NASDAQ:PAAS), American States Water Co (NYSE:AWR), and AerCap Holdings N.V. (NYSE:AER). All of these stocks’ market caps are closest to NWE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CCJ 24 267635 -4
PAAS 30 341386 0
AWR 19 50907 -2
AER 32 616402 -4
Average 26.25 319083 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $319 million. That figure was $126 million in NWE’s case. AerCap Holdings N.V. (NYSE:AER) is the most popular stock in this table. On the other hand American States Water Co (NYSE:AWR) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks NorthWestern Corporation (NYSE:NWE) is even less popular than AWR. Hedge funds dodged a bullet by taking a bearish stance towards NWE. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately NWE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); NWE investors were disappointed as the stock returned -8.7% since Q1 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 most of these stocks already outperformed the market so far in 2020.

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