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Did Hedge Funds Make The Right Call On Sempra Energy (SRE) ?

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 Sempra Energy (NYSE:SRE) and determine whether hedge funds had an edge regarding this stock.

Sempra Energy (NYSE:SRE) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that SRE 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Clint Carlson of Carlson Capital

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 let’s analyze the key hedge fund action surrounding Sempra Energy (NYSE:SRE).

How are hedge funds trading Sempra Energy (NYSE:SRE)?

At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in SRE a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SRE A Good Stock To Buy?

More specifically, D E Shaw was the largest shareholder of Sempra Energy (NYSE:SRE), with a stake worth $141.6 million reported as of the end of September. Trailing D E Shaw was Adage Capital Management, which amassed a stake valued at $113.9 million. AQR Capital Management, Renaissance Technologies, and D E Shaw 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 Sempra Energy (NYSE:SRE), around 1.61% of its 13F portfolio. Highbridge Capital Management is also relatively very bullish on the stock, dishing out 1.25 percent of its 13F equity portfolio to SRE.

Because Sempra Energy (NYSE:SRE) has experienced bearish sentiment from hedge fund managers, logic holds that there exists a select few hedge funds that decided to sell off their entire stakes last quarter. It’s worth mentioning that Clint Carlson’s Carlson Capital dropped the biggest investment of all the hedgies followed by Insider Monkey, worth an estimated $47.6 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund dumped about $13.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 8 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Sempra Energy (NYSE:SRE) but similarly valued. These stocks are Analog Devices, Inc. (NASDAQ:ADI), Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), Banco Bradesco SA (NYSE:BBD), and Barrick Gold Corporation (NYSE:GOLD). This group of stocks’ market values are similar to SRE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADI 45 1979695 -6
SMFG 10 104520 -1
BBD 15 246087 -3
GOLD 54 1756373 3
Average 31 1021669 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1022 million. That figure was $505 million in SRE’s case. Barrick Gold Corporation (NYSE:GOLD) is the most popular stock in this table. On the other hand Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) is the least popular one with only 10 bullish hedge fund positions. Sempra Energy (NYSE:SRE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately SRE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SRE investors were disappointed as the stock returned 4.7% during the second quarter 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 in 2020.

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