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Were Hedge Funds Right About CMS Energy Corporation (CMS)?

Will the new coronavirus cause a recession in US in the next 6 months? On February 27th, we put the probability at 75% and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards CMS Energy Corporation (NYSE:CMS).

CMS Energy Corporation (NYSE:CMS) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 30 hedge funds’ portfolios at the end of December. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Marvell Technology Group Ltd. (NASDAQ:MRVL), Arthur J. Gallagher & Co. (NYSE:AJG), and ArcelorMittal (NYSE:MT) to gather more data points. Our calculations also showed that CMS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus Management

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a glance at the latest hedge fund action encompassing CMS Energy Corporation (NYSE:CMS).

What does smart money think about CMS Energy Corporation (NYSE:CMS)?

At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 21 hedge funds held shares or bullish call options in CMS a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

The largest stake in CMS Energy Corporation (NYSE:CMS) was held by Millennium Management, which reported holding $91.9 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $83.8 million position. Other investors bullish on the company included ExodusPoint Capital, Two Sigma Advisors, and Luminus Management. In terms of the portfolio weights assigned to each position Shelter Harbor Advisors allocated the biggest weight to CMS Energy Corporation (NYSE:CMS), around 5.73% of its 13F portfolio. Sustainable Insight Capital Management is also relatively very bullish on the stock, earmarking 2.65 percent of its 13F equity portfolio to CMS.

Because CMS Energy Corporation (NYSE:CMS) has witnessed a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers that slashed their entire stakes in the third quarter. At the top of the heap, Rajiv Jain’s GQG Partners dropped the biggest stake of the 750 funds followed by Insider Monkey, totaling close to $204.4 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dumped about $16.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to CMS Energy Corporation (NYSE:CMS). We will take a look at Marvell Technology Group Ltd. (NASDAQ:MRVL), Arthur J. Gallagher & Co. (NYSE:AJG), ArcelorMittal (NYSE:MT), and Lennar Corporation (NYSE:LEN). This group of stocks’ market caps are similar to CMS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRVL 29 584397 -5
AJG 31 395355 4
MT 17 353286 3
LEN 63 1861573 4
Average 35 798653 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $799 million. That figure was $526 million in CMS’s case. Lennar Corporation (NYSE:LEN) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 17 bullish hedge fund positions. CMS Energy Corporation (NYSE:CMS) is not the least popular stock in this group but hedge fund interest is still below average. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. A small number of hedge funds were also right about betting on CMS, though not to the same extent, as the stock returned -10.4% during the same time period and outperformed the market.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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