The AES Corporation (AES): Hedge Funds In Wait-and-See Mode

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards The AES Corporation (NYSE:AES) and determine whether hedge funds skillfully traded this stock.

Hedge fund interest in The AES Corporation (NYSE:AES) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that AES 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 AES to other stocks including CNH Industrial NV (NYSE:CNHI), WPP Plc (NYSE:WPP), and Live Nation Entertainment, Inc. (NYSE:LYV) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.


Jeffrey Ubben of ValueAct Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s take a peek at the new hedge fund action regarding The AES Corporation (NYSE:AES).

How are hedge funds trading The AES Corporation (NYSE:AES)?

At second quarter’s end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards AES over the last 20 quarters. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of The AES Corporation (NYSE:AES), with a stake worth $144.6 million reported as of the end of September. Trailing Renaissance Technologies was Electron Capital Partners, which amassed a stake valued at $100.6 million. ValueAct Capital, Adage Capital Management, 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 Electron Capital Partners allocated the biggest weight to The AES Corporation (NYSE:AES), around 11.02% of its 13F portfolio. Becker Drapkin Management is also relatively very bullish on the stock, designating 5.36 percent of its 13F equity portfolio to AES.

Judging by the fact that The AES Corporation (NYSE:AES) has faced falling interest from hedge fund managers, logic holds that there was a specific group of hedgies that elected to cut their full holdings by the end of the second quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the biggest stake of all the hedgies monitored by Insider Monkey, comprising about $17 million in stock. Anna Nikolayevsky’s fund, Axel Capital Management, also dropped its stock, about $2.7 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to The AES Corporation (NYSE:AES). We will take a look at CNH Industrial NV (NYSE:CNHI), WPP Plc (NYSE:WPP), Live Nation Entertainment, Inc. (NYSE:LYV), Avery Dennison Corporation (NYSE:AVY), Packaging Corporation Of America (NYSE:PKG), Eastman Chemical Company (NYSE:EMN), and Raymond James Financial, Inc. (NYSE:RJF). This group of stocks’ market values are similar to AES’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNHI 17 205909 0
WPP 9 34980 4
LYV 44 1194049 -2
AVY 29 175959 11
PKG 25 101486 2
EMN 27 184901 -2
RJF 35 436156 4
Average 26.6 333349 2.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.6 hedge funds with bullish positions and the average amount invested in these stocks was $333 million. That figure was $564 million in AES’s case. Live Nation Entertainment, Inc. (NYSE:LYV) is the most popular stock in this table. On the other hand WPP Plc (NYSE:WPP) is the least popular one with only 9 bullish hedge fund positions. The AES Corporation (NYSE:AES) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AES is 66.4. 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. 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on AES as the stock returned 25% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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