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 Enphase Energy Inc (NASDAQ:ENPH) and determine whether hedge funds had an edge regarding this stock.
Is Enphase Energy Inc (NASDAQ:ENPH) the right investment to pursue these days? Prominent investors were turning bullish. The number of bullish hedge fund bets moved up by 5 lately. Enphase Energy Inc (NASDAQ:ENPH) was in 40 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ENPH isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let’s take a look at the new hedge fund action surrounding Enphase Energy Inc (NASDAQ:ENPH).
What does smart money think about Enphase Energy Inc (NASDAQ:ENPH)?
At Q2’s end, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in ENPH a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, Sylebra Capital Management held the most valuable stake in Enphase Energy Inc (NASDAQ:ENPH), which was worth $156.2 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $115.9 million worth of shares. Park West Asset Management, Electron Capital Partners, and Citadel Investment Group 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 Electron Capital Partners allocated the biggest weight to Enphase Energy Inc (NASDAQ:ENPH), around 8.15% of its 13F portfolio. Arosa Capital Management is also relatively very bullish on the stock, setting aside 4.98 percent of its 13F equity portfolio to ENPH.
Consequently, key hedge funds were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Enphase Energy Inc (NASDAQ:ENPH). Balyasny Asset Management had $22.7 million invested in the company at the end of the quarter. Zachary Miller’s Parian Global Management also made a $12.6 million investment in the stock during the quarter. The following funds were also among the new ENPH investors: Bruce Kovner’s Caxton Associates LP, Mark Coe’s Intrinsic Edge Capital, and Noam Gottesman’s GLG Partners.
Let’s now take a look at hedge fund activity in other stocks similar to Enphase Energy Inc (NASDAQ:ENPH). We will take a look at Tandem Diabetes Care Inc (NASDAQ:TNDM), Allogene Therapeutics, Inc. (NASDAQ:ALLO), Globant SA (NYSE:GLOB), Huaneng Power International Inc (NYSE:HNP), AMERCO (NASDAQ:UHAL), B2Gold Corp (NYSE:BTG), and GFL Environmental Inc. (NYSE:GFL). This group of stocks’ market values are similar to ENPH’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.4 hedge funds with bullish positions and the average amount invested in these stocks was $286 million. That figure was $717 million in ENPH’s case. Tandem Diabetes Care Inc (NASDAQ:TNDM) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Enphase Energy Inc (NASDAQ:ENPH) is more popular among hedge funds. Our overall hedge fund sentiment score for ENPH is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on ENPH as the stock returned 62.4% since the end of June 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.