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Did Hedge Funds Make The Right Call On Vistra Energy Corp. (VST) ?

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 Vistra Energy Corp. (NYSE:VST) and determine whether hedge funds had an edge regarding this stock.

Is Vistra Energy Corp. (NYSE:VST) undervalued? Hedge funds were in a pessimistic mood. The number of long hedge fund bets were trimmed by 10 in recent months. Our calculations also showed that VST 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). VST was in 39 hedge funds’ portfolios at the end of March. There were 49 hedge funds in our database with VST positions at the end of the previous quarter.

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.

Jeremy Mindich - Scopia Capital

Jeremy Mindich of Scopia 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. Now let’s view the key hedge fund action surrounding Vistra Energy Corp. (NYSE:VST).

What have hedge funds been doing with Vistra Energy Corp. (NYSE:VST)?

Heading into the second quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from one quarter earlier. On the other hand, there were a total of 48 hedge funds with a bullish position in VST a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Vistra Energy Corp. (NYSE:VST) was held by Oaktree Capital Management, which reported holding $483.2 million worth of stock at the end of September. It was followed by GoldenTree Asset Management with a $142.3 million position. Other investors bullish on the company included Scopia Capital, Avenue Capital, and Angelo Gordon & Co. In terms of the portfolio weights assigned to each position Avenue Capital allocated the biggest weight to Vistra Energy Corp. (NYSE:VST), around 84.26% of its 13F portfolio. GoldenTree Asset Management is also relatively very bullish on the stock, designating 26.33 percent of its 13F equity portfolio to VST.

Since Vistra Energy Corp. (NYSE:VST) has faced a decline in interest from the smart money, logic holds that there was a specific group of hedgies that slashed their positions entirely last quarter. Intriguingly, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors sold off the largest position of the “upper crust” of funds followed by Insider Monkey, totaling close to $89.7 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also dropped its stock, about $78.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 10 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Vistra Energy Corp. (NYSE:VST). We will take a look at CenterPoint Energy, Inc. (NYSE:CNP), Nordson Corporation (NASDAQ:NDSN), Erie Indemnity Company (NASDAQ:ERIE), and Apollo Global Management Inc (NYSE:APO). This group of stocks’ market valuations resemble VST’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNP 32 560894 2
NDSN 22 98925 -7
ERIE 17 63002 -3
APO 34 1487468 5
Average 26.25 552572 -0.75

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 $553 million. That figure was $1440 million in VST’s case. Apollo Global Management Inc (NYSE:APO) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Vistra Energy Corp. (NYSE:VST) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately VST wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VST were disappointed as the stock returned 17.5% 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.