This Metric Says You Are Smart to Sell Dynegy Inc. (DYN)

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Is Dynegy Inc. (NYSE:DYN) a good investment?

To many of your fellow readers, hedge funds are seen as useless, outdated investment tools of a forgotten age. Although there are over 8,000 hedge funds trading in present day, this site looks at the upper echelon of this club, close to 525 funds. It is widely held that this group controls most of the smart money’s total capital, and by watching their highest quality equity investments, we’ve spotted a number of investment strategies that have historically outperformed the broader indices. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points a year for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have trumped the S&P 500 index by 33 percentage points in 11 months (find a sample of our picks).

Dynegy Inc. (NYSE:DYN)

Equally as key, positive insider trading sentiment is another way to analyze the stock market universe. Obviously, there are plenty of motivations for an executive to get rid of shares of his or her company, but only one, very clear reason why they would behave bullishly. Many empirical studies have demonstrated the market-beating potential of this method if shareholders understand what to do (learn more here).

Now that that’s out of the way, we’re going to analyze the recent info about Dynegy Inc. (NYSE:DYN).

Hedge fund activity in Dynegy Inc. (NYSE:DYN)

In preparation for the third quarter, a total of 15 of the hedge funds we track were long in this stock, a change of -17% from one quarter earlier. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings significantly.

When using filings from the hedgies we track, Oaktree Capital Management, managed by Howard Marks, holds the biggest position in Dynegy Inc. (NYSE:DYN). Oaktree Capital Management has a $175.9 million position in the stock, comprising 3.6% of its 13F portfolio. Coming in second is Marc Lasry of Avenue Capital, with a $115.9 million position; 14.2% of its 13F portfolio is allocated to the company. Remaining hedge funds with similar optimism include Don Morgan’s Brigade Capital, Brian J. Higgins’s King Street Capital and Tom Wagner and Ara Cohen’s Knighthead Capital.

Judging by the fact that Dynegy Inc. (NYSE:DYN) has experienced a fall in interest from the smart money’s best and brightest, it’s safe to say that there was a specific group of money managers that slashed their full holdings last quarter. At the top of the heap, Nick Niell’s Arrowgrass Capital Partners dropped the biggest stake of the “upper crust” of funds we key on, valued at close to $47.8 million in stock. Jamie Zimmerman’s fund, Litespeed Management, also sold off its stock, about $22.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds last quarter.

Insider trading activity in Dynegy Inc. (NYSE:DYN)

Legal insider trading, particularly when it’s bullish, is particularly usable when the company in question has seen transactions within the past 180 days. Over the last six-month time frame, Dynegy Inc. (NYSE:DYN) has experienced zero unique insiders purchasing, and zero insider sales (see the details of insider trades here).

We’ll also take a look at the relationship between both of these indicators in other stocks similar to Dynegy Inc. (NYSE:DYN). These stocks are Portland General Electric Company (NYSE:POR), IDACORP Inc (NYSE:IDA), Great Plains Energy Incorporated (NYSE:GXP), Hawaiian Electric Industries, Inc. (NYSE:HE), and Cleco Corporation (NYSE:CNL). All of these stocks are in the electric utilities industry and their market caps resemble DYN’s market cap.

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