Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
Is The Southern Company (NYSE:SO) a buy right now? Hedge funds are in a bearish mood. The number of long hedge fund bets went down by 1 recently. Our calculations also showed that so isn't among the 30 most popular stocks among hedge funds. SO was in 19 hedge funds' portfolios at the end of March. There were 20 hedge funds in our database with SO holdings at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
We're going to go over the recent hedge fund action surrounding The Southern Company (NYSE:SO).
How have hedgies been trading The Southern Company (NYSE:SO)?
Heading into the second quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from one quarter earlier. On the other hand, there were a total of 15 hedge funds with a bullish position in SO a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of The Southern Company (NYSE:SO), with a stake worth $466.2 million reported as of the end of March. Trailing Renaissance Technologies was Point72 Asset Management, which amassed a stake valued at $94.7 million. Citadel Investment Group, AQR Capital Management, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as The Southern Company (NYSE:SO) has witnessed declining sentiment from the aggregate hedge fund industry, it's safe to say that there were a few hedgies that slashed their positions entirely last quarter. Interestingly, Stuart J. Zimmer's Zimmer Partners dropped the biggest investment of the "upper crust" of funds monitored by Insider Monkey, valued at about $84.5 million in stock, and Matthew Tewksbury's Stevens Capital Management was right behind this move, as the fund dumped about $21.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as The Southern Company (NYSE:SO) but similarly valued. We will take a look at Boston Scientific Corporation (NYSE:BSX), Sony Corporation (NYSE:SNE), Crown Castle International Corp. (REIT) (NYSE:CCI), and General Motors Company (NYSE:GM). This group of stocks' market values match SO's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BSX,47,2098911,1 SNE,22,569371,-3 CCI,35,2190500,1 GM,53,5393147,-7 Average,39.25,2562982,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 39.25 hedge funds with bullish positions and the average amount invested in these stocks was $2563 million. That figure was $847 million in SO's case. General Motors Company (NYSE:GM) is the most popular stock in this table. On the other hand Sony Corporation (NYSE:SNE) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks The Southern Company (NYSE:SO) is even less popular than SNE. Hedge funds clearly dropped the ball on SO as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on SO as the stock returned 3.7% during the same period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.