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NorthWestern Corporation (NWE): Hedge Funds Are In Wait and See Mode

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like NorthWestern Corporation (NYSE:NWE).

NorthWestern Corporation (NYSE:NWE) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. 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 Ormat Technologies, Inc. (NYSE:ORA), Eagle Materials, Inc. (NYSE:EXP), and Ternium S.A. (NYSE:TX) to gather more data points. Our calculations also showed that NWE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Mario Gabelli of GAMCO Investors

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s view the latest hedge fund action encompassing NorthWestern Corporation (NYSE:NWE).

Hedge fund activity in NorthWestern Corporation (NYSE:NWE)

Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NWE over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, AQR Capital Management was the largest shareholder of NorthWestern Corporation (NYSE:NWE), with a stake worth $119 million reported as of the end of September. Trailing AQR Capital Management was GLG Partners, which amassed a stake valued at $25.3 million. Renaissance Technologies, GAMCO Investors, and Millennium 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 Shelter Harbor Advisors allocated the biggest weight to NorthWestern Corporation (NYSE:NWE), around 2.27% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, setting aside 0.18 percent of its 13F equity portfolio to NWE.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: ExodusPoint Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Paloma Partners).

Let’s check out hedge fund activity in other stocks similar to NorthWestern Corporation (NYSE:NWE). These stocks are Ormat Technologies, Inc. (NYSE:ORA), Eagle Materials, Inc. (NYSE:EXP), Ternium S.A. (NYSE:TX), and Cyberark Software Ltd (NASDAQ:CYBR). All of these stocks’ market caps are closest to NWE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ORA 16 193542 7
EXP 36 819307 0
TX 8 52465 -6
CYBR 18 257050 -1
Average 19.5 330591 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $331 million. That figure was $233 million in NWE’s case. Eagle Materials, Inc. (NYSE:EXP) is the most popular stock in this table. On the other hand Ternium S.A. (NYSE:TX) is the least popular one with only 8 bullish hedge fund positions. NorthWestern Corporation (NYSE:NWE) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately NWE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NWE investors were disappointed as the stock returned -4.6% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.

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

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