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Hedge Funds Have Never Been This Bullish On Tallgrass Energy, LP (TGE)

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Tallgrass Energy, LP (NYSE:TGE) to find out whether it was one of their high conviction long-term ideas.

Is Tallgrass Energy, LP (NYSE:TGE) the right investment to pursue these days? Prominent investors are taking an optimistic view. The number of bullish hedge fund bets rose by 2 lately. Our calculations also showed that TGE isn’t among the 30 most popular stocks among hedge funds (view the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

TGE_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a glance at the latest hedge fund action surrounding Tallgrass Energy, LP (NYSE:TGE).

How have hedgies been trading Tallgrass Energy, LP (NYSE:TGE)?

At the end of the second quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. By comparison, 5 hedge funds held shares or bullish call options in TGE a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Dmitry Balyasny

Among these funds, Citadel Investment Group held the most valuable stake in Tallgrass Energy, LP (NYSE:TGE), which was worth $13.7 million at the end of the second quarter. On the second spot was Citadel Investment Group which amassed $13.4 million worth of shares. Moreover, Zimmer Partners, JHL Capital Group, and GLG Partners were also bullish on Tallgrass Energy, LP (NYSE:TGE), allocating a large percentage of their portfolios to this stock.

As one would reasonably expect, key money managers were leading the bulls’ herd. Perella Weinberg Partners, created the biggest position in Tallgrass Energy, LP (NYSE:TGE). Perella Weinberg Partners had $2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $0.8 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management, Michael Platt and William Reeves’s BlueCrest Capital Mgmt., and Claes Fornell’s CSat Investment Advisory.

Let’s also examine hedge fund activity in other stocks similar to Tallgrass Energy, LP (NYSE:TGE). We will take a look at AGCO Corporation (NYSE:AGCO), Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (NYSE:PAC), Cimarex Energy Co (NYSE:XEC), and Ares Management Corporation (NYSE:ARES). All of these stocks’ market caps are closest to TGE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AGCO 25 227411 -1
PAC 4 105017 -3
XEC 27 1108459 -3
ARES 10 181196 -4
Average 16.5 405521 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $406 million. That figure was $47 million in TGE’s case. Cimarex Energy Co (NYSE:XEC) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (NYSE:PAC) is the least popular one with only 4 bullish hedge fund positions. Tallgrass Energy, LP (NYSE:TGE) 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately TGE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TGE investors were disappointed as the stock returned -2% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

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

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