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Should You Buy The Southern Company (SO)?

It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 7% during October and average hedge fund losing about 3%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by about 4 percentage points during the first half of Q4, as investors fled less-known quantities for safe havens. This was the case with hedge funds, who we heard were pulling money from the market amid the volatility, which included money from small-cap stocks, which they invest in at a higher rate than other investors. This action contributed to the greater decline in these stocks during the tumultuous period. We will study how this market volatility affected their sentiment towards The Southern Company (NYSE:SO) during the quarter below.

The Southern Company (NYSE:SO) has experienced an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that SO isn’t among the 30 most popular stocks among hedge funds.

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 18 percentage points since May 2014 through December 3, 2018 (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.

RENAISSANCE TECHNOLOGIES

We’re going to check out the recent hedge fund action surrounding The Southern Company (NYSE:SO).

What does the smart money think about The Southern Company (NYSE:SO)?

At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 71% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SO over the last 13 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SO_dec2018

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, managed by Jim Simons, holds the biggest position in The Southern Company (NYSE:SO). Renaissance Technologies has a $209.8 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is Zimmer Partners, managed by Stuart J. Zimmer, which holds a $63.2 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Other peers with similar optimism encompass Israel Englander’s Millennium Management, Cliff Asness’s AQR Capital Management and John W. Rogers’s Ariel Investments.

As industrywide interest jumped, some big names were leading the bulls’ herd. Zimmer Partners, managed by Stuart J. Zimmer, established the biggest position in The Southern Company (NYSE:SO). Zimmer Partners had $63.2 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $43.6 million investment in the stock during the quarter. The following funds were also among the new SO investors: Jonathan Barrett and Paul Segal’s Luminus Management, Dmitry Balyasny’s Balyasny Asset Management, and D. E. Shaw’s D E Shaw.

Let’s check out hedge fund activity in other stocks similar to The Southern Company (NYSE:SO). We will take a look at Brookfield Asset Management Inc. (NYSE:BAM), Zoetis Inc (NYSE:ZTS), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), and Intercontinental Exchange Inc (NYSE:ICE). This group of stocks’ market valuations match SO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BAM 21 1114694 -1
ZTS 41 2241164 2
REGN 30 1033013 2
ICE 36 2850130 3
Average 32 1809750 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1.81 billion. That figure was $498 million in SO’s case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Brookfield Asset Management Inc. (NYSE:BAM) is the least popular one with only 21 bullish hedge fund positions. The Southern Company (NYSE:SO) 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. In this regard ZTS might be a better candidate to consider a long position.

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

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