Pinnacle West Capital Corporation (PNW): Hedge Fund Sentiment Unchanged

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 Pinnacle West Capital Corporation (NYSE:PNW) and determine whether hedge funds had an edge regarding this stock.

Pinnacle West Capital Corporation (NYSE:PNW) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 25 hedge funds’ portfolios at the end of June. Our calculations also showed that PNW 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). At the end of this article we will also compare PNW to other stocks including Everest Re Group Ltd (NYSE:RE), Phillips 66 Partners LP (NYSE:PSXP), and Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) to get a better sense of its popularity.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Alex Litowitz Magnetar Capital

Alex Litowitz of Magnetar Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 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 analyze the recent hedge fund action regarding Pinnacle West Capital Corporation (NYSE:PNW).

How have hedgies been trading Pinnacle West Capital Corporation (NYSE:PNW)?

At the end of the second quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 23 hedge funds held shares or bullish call options in PNW a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Pinnacle West Capital Corporation (NYSE:PNW) was held by Zimmer Partners, which reported holding $226 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $166.5 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and Electron Capital Partners. In terms of the portfolio weights assigned to each position Electron Capital Partners allocated the biggest weight to Pinnacle West Capital Corporation (NYSE:PNW), around 6.04% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, designating 3.06 percent of its 13F equity portfolio to PNW.

Judging by the fact that Pinnacle West Capital Corporation (NYSE:PNW) has faced bearish sentiment from hedge fund managers, we can see that there is a sect of money managers that decided to sell off their entire stakes heading into Q3. Intriguingly, Clint Carlson’s Carlson Capital cut the biggest investment of the 750 funds followed by Insider Monkey, comprising an estimated $22.5 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund dumped about $4.5 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Pinnacle West Capital Corporation (NYSE:PNW) but similarly valued. These stocks are Everest Re Group Ltd (NYSE:RE), Phillips 66 Partners LP (NYSE:PSXP), Ionis Pharmaceuticals, Inc. (NASDAQ:IONS), Albemarle Corporation (NYSE:ALB), Immunomedics, Inc. (NASDAQ:IMMU), Royal Gold, Inc (NASDAQ:RGLD), and Mobile TeleSystems Public Joint Stock Company (NYSE:MBT). This group of stocks’ market caps are closest to PNW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RE 29 585163 2
PSXP 6 29854 1
IONS 23 387779 1
ALB 25 66986 1
IMMU 48 2295437 21
RGLD 27 425497 -1
MBT 11 344072 2
Average 24.1 590684 3.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.1 hedge funds with bullish positions and the average amount invested in these stocks was $591 million. That figure was $753 million in PNW’s case. Immunomedics, Inc. (NASDAQ:IMMU) is the most popular stock in this table. On the other hand Phillips 66 Partners LP (NYSE:PSXP) is the least popular one with only 6 bullish hedge fund positions. Pinnacle West Capital Corporation (NYSE:PNW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PNW is 55.4. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately PNW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PNW were disappointed as the stock returned 1.6% during the same time period 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 many of these stocks already outperformed the market so far this year.

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