Was The Smart Money Right About FirstEnergy Corp. (FE)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards FirstEnergy Corp. (NYSE:FE).

FirstEnergy Corp. (NYSE:FE) was in 41 hedge funds’ portfolios at the end of June. The all time high for this statistics is 44. FE has experienced a decrease in hedge fund sentiment in recent months. There were 44 hedge funds in our database with FE holdings at the end of March. Our calculations also showed that FE 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).

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 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 58 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. Keeping this in mind we’re going to check out the key hedge fund action regarding FirstEnergy Corp. (NYSE:FE).

What does smart money think about FirstEnergy Corp. (NYSE:FE)?

At second quarter’s end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FE over the last 20 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of FirstEnergy Corp. (NYSE:FE), with a stake worth $247.5 million reported as of the end of September. Trailing Renaissance Technologies was Zimmer Partners, which amassed a stake valued at $118.1 million. Citadel Investment Group, Two Sigma Advisors, and D E Shaw 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 Blackstart Capital allocated the biggest weight to FirstEnergy Corp. (NYSE:FE), around 10.2% of its 13F portfolio. Kingstown Capital Management is also relatively very bullish on the stock, dishing out 9.13 percent of its 13F equity portfolio to FE.

Judging by the fact that FirstEnergy Corp. (NYSE:FE) has witnessed falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedge funds who sold off their full holdings last quarter. At the top of the heap, Jonathan Barrett and Paul Segal’s Luminus Management sold off the largest stake of the 750 funds followed by Insider Monkey, totaling about $33 million in stock. Josh Donfeld and David Rogers’s fund, Castle Hook Partners, also cut its stock, about $31.4 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as FirstEnergy Corp. (NYSE:FE) but similarly valued. These stocks are Simon Property Group, Inc (NYSE:SPG), Canon Inc. (NYSE:CAJ), Equifax Inc. (NYSE:EFX), Cerner Corporation (NASDAQ:CERN), Fiat Chrysler Automobiles NV (NYSE:FCAU), DTE Energy Company (NYSE:DTE), and New Oriental Education & Technology Group Inc. (NYSE:EDU). This group of stocks’ market valuations match FE’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.4 hedge funds with bullish positions and the average amount invested in these stocks was $683 million. That figure was $992 million in FE’s case. New Oriental Education & Technology Group Inc. (NYSE:EDU) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks FirstEnergy Corp. (NYSE:FE) is more popular among hedge funds. Our overall hedge fund sentiment score for FE is 80. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Unfortunately FE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FE were disappointed as the stock returned -13% since the end of the second quarter (through 10/23) 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 most of these stocks already outperformed the market in 2020.

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