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Were Hedge Funds Right About Flocking Into Energy Transfer L.P. (NYSE:ET)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 86% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Energy Transfer L.P. (NYSE:ET).

Energy Transfer L.P. (NYSE:ET) was in 30 hedge funds’ portfolios at the end of December. ET investors should be aware of an increase in hedge fund sentiment of late. There were 22 hedge funds in our database with ET positions at the end of the previous quarter. Our calculations also showed that ET 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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

APPALOOSA MANAGEMENT LP

We’re going to take a peek at the new hedge fund action encompassing Energy Transfer L.P. (NYSE:ET).

What does the smart money think about Energy Transfer L.P. (NYSE:ET)?

At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 36% from one quarter earlier. On the other hand, there were a total of 15 hedge funds with a bullish position in ET a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

ET_mar2019

More specifically, Zimmer Partners was the largest shareholder of Energy Transfer L.P. (NYSE:ET), with a stake worth $117.9 million reported as of the end of September. Trailing Zimmer Partners was Point72 Asset Management, which amassed a stake valued at $112.9 million. Appaloosa Management LP, Nokota Management, and Magnetar Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most outsized position in Energy Transfer L.P. (NYSE:ET). Arrowstreet Capital had $42 million invested in the company at the end of the quarter. Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners also initiated a $16.3 million position during the quarter. The following funds were also among the new ET investors: Tsachy Mishal’s TAM Capital Management, Matthew Halbower’s Pentwater Capital Management, and Thiru Ramakrishnan’s TVR Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Energy Transfer L.P. (NYSE:ET) but similarly valued. These stocks are Target Corporation (NYSE:TGT), Delta Air Lines, Inc. (NYSE:DAL), Kinder Morgan Inc (NYSE:KMI), and Prudential Financial Inc (NYSE:PRU). This group of stocks’ market values resemble ET’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TGT 40 1209924 -2
DAL 73 6625539 6
KMI 48 1658607 -2
PRU 31 516818 -2
Average 48 2502722 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 48 hedge funds with bullish positions and the average amount invested in these stocks was $2503 million. That figure was $741 million in ET’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand Prudential Financial Inc (NYSE:PRU) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Energy Transfer L.P. (NYSE:ET) is even less popular than PRU though hedge fund sentiment towards the stock is improving dramatically as several hedge funds initiated brand new positions in the stock. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on ET, though not to the same extent, as the stock returned 16.4% and outperformed the market as well.

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

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