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Were Hedge Funds Right About Souring On American Electric Power Company, Inc. (AEP)

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors’ consensus picks have done well on average over the long-term. The top 15 S&P 500 stocks among hedge funds at the end of September 2018 returned an average of 1% through March 15th whereas the S&P 500 Index ETF lost 2.2% during the same period. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at American Electric Power Company, Inc. (NYSE:AEP) from the perspective of those elite funds.

Is American Electric Power Company, Inc. (NYSE:AEP) a cheap investment today? The smart money is becoming less hopeful. The number of long hedge fund positions went down by 2 lately. Our calculations also showed that AEP isn’t among the 30 most popular stocks among hedge funds.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

MILLENNIUM MANAGEMENT

We’re going to take a glance at the recent hedge fund action regarding American Electric Power Company, Inc. (NYSE:AEP).

How are hedge funds trading American Electric Power Company, Inc. (NYSE:AEP)?

Heading into the first quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in AEP a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

AEP_mar2019

Among these funds, Renaissance Technologies held the most valuable stake in American Electric Power Company, Inc. (NYSE:AEP), which was worth $454.8 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $239.3 million worth of shares. Moreover, AQR Capital Management, Millennium Management, and Adage Capital Management were also bullish on American Electric Power Company, Inc. (NYSE:AEP), allocating a large percentage of their portfolios to this stock.

Judging by the fact that American Electric Power Company, Inc. (NYSE:AEP) has experienced a decline in interest from hedge fund managers, it’s safe to say that there is a sect of money managers who sold off their entire stakes in the third quarter. Intriguingly, Jonathan Barrett and Paul Segal’s Luminus Management said goodbye to the largest stake of all the hedgies tracked by Insider Monkey, worth an estimated $54.2 million in stock, and Brian Olson, Baehyun Sung, and Jamie Waters’s Blackstart Capital was right behind this move, as the fund sold off about $20.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 2 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to American Electric Power Company, Inc. (NYSE:AEP). These stocks are The Sherwin-Williams Company (NYSE:SHW), Cognizant Technology Solutions Corp (NASDAQ:CTSH), Keurig Dr Pepper Inc. (NYSE:KDP), and The Blackstone Group L.P. (NYSE:BX). This group of stocks’ market values are closest to AEP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SHW 50 1977057 12
CTSH 41 2068789 -1
KDP 21 566206 -4
BX 33 509703 -2
Average 36.25 1280439 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $1280 million. That figure was $1059 million in AEP’s case. The Sherwin-Williams Company (NYSE:SHW) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NYSE:KDP) is the least popular one with only 21 bullish hedge fund positions. American Electric Power Company, Inc. (NYSE:AEP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately AEP wasn’t in this group. Hedge funds that bet on AEP were disappointed as the stock returned 13.1% (flat relative to the market). If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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