Nextera Energy Partners LP (NEP): Hedge Funds In Wait-and-See Mode

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 Nextera Energy Partners LP (NYSE:NEP) and determine whether hedge funds had an edge regarding this stock.

Nextera Energy Partners LP (NYSE:NEP) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds’ portfolios at the end of June. Our calculations also showed that NEP 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). 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 Envista Holdings Corporation (NYSE:NVST), RBC Bearings Incorporated (NASDAQ:ROLL), and Mattel, Inc. (NASDAQ:MAT) to gather more data points. Our calculations also showed that NEP 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.

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.

Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

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. We are also checking out this lithium company which could benefit from the electric car adoption. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a peek at the recent hedge fund action surrounding Nextera Energy Partners LP (NYSE:NEP).

Hedge fund activity in Nextera Energy Partners LP (NYSE:NEP)

At the end of June, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. On the other hand, there were a total of 13 hedge funds with a bullish position in NEP a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Is NEP A Good Stock To Buy?

More specifically, Electron Capital Partners was the largest shareholder of Nextera Energy Partners LP (NYSE:NEP), with a stake worth $50 million reported as of the end of September. Trailing Electron Capital Partners was Millennium Management, which amassed a stake valued at $17.3 million. PEAK6 Capital Management, Wexford Capital, and PEAK6 Capital Management 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 Nextera Energy Partners LP (NYSE:NEP), around 5.48% of its 13F portfolio. Yaupon Capital is also relatively very bullish on the stock, earmarking 3.74 percent of its 13F equity portfolio to NEP.

Judging by the fact that Nextera Energy Partners LP (NYSE:NEP) has witnessed bearish sentiment from the smart money, we can see that there was a specific group of funds who sold off their positions entirely heading into Q3. Interestingly, Till Bechtolsheimer’s Arosa Capital Management dropped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising close to $5.4 million in stock, and John Bader’s Halcyon Asset Management was right behind this move, as the fund cut about $4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to Nextera Energy Partners LP (NYSE:NEP). We will take a look at Envista Holdings Corporation (NYSE:NVST), RBC Bearings Incorporated (NASDAQ:ROLL), Mattel, Inc. (NASDAQ:MAT), Cosan Limited (NYSE:CZZ), Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), Clean Harbors Inc (NYSE:CLH), and PTC Therapeutics, Inc. (NASDAQ:PTCT). All of these stocks’ market caps resemble NEP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NVST 21 395641 -1
ROLL 17 61588 8
MAT 25 595357 8
CZZ 14 160277 -1
DCPH 31 761061 3
CLH 19 237400 -6
PTCT 31 278428 3
Average 22.6 355679 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $356 million. That figure was $125 million in NEP’s case. Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is the most popular stock in this table. On the other hand Cosan Limited (NYSE:CZZ) is the least popular one with only 14 bullish hedge fund positions. Nextera Energy Partners LP (NYSE:NEP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NEP is 55.6. 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 gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on NEP as the stock returned 18% in the third quarter and outperformed the market by an even larger margin.

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