At the end of February we announced the arrival of the first US recession since 2009 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 The Southern Company (NYSE:SO).
Is The Southern Company (NYSE:SO) the right pick for your portfolio? The best stock pickers are buying. The number of long hedge fund positions moved up by 3 recently. Our calculations also showed that SO isn't among the 30 most popular stocks among hedge funds (click for Q1 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 51 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020's unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. 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 the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let's view the recent hedge fund action surrounding The Southern Company (NYSE:SO).
How are hedge funds trading The Southern Company (NYSE:SO)?
At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the fourth quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in SO a year ago. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of The Southern Company (NYSE:SO), with a stake worth $412.1 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $71 million. Zimmer Partners, Adage Capital Management, and AQR Capital Management 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 Horseman Capital Management allocated the biggest weight to The Southern Company (NYSE:SO), around 1.79% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, designating 1.48 percent of its 13F equity portfolio to SO.
With a general bullishness amongst the heavyweights, key hedge funds have jumped into The Southern Company (NYSE:SO) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, established the largest position in The Southern Company (NYSE:SO). Adage Capital Management had $65.1 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also initiated a $5.6 million position during the quarter. The other funds with brand new SO positions are Franklin Parlamis's Aequim Alternative Investments, Alec Litowitz and Ross Laser's Magnetar Capital, and Israel Englander's Millennium Management.
Let's now review hedge fund activity in other stocks similar to The Southern Company (NYSE:SO). We will take a look at Colgate-Palmolive Company (NYSE:CL), Rio Tinto Group (NYSE:RIO), Zoetis Inc (NYSE:ZTS), and Canadian National Railway Company (NYSE:CNI). This group of stocks' market valuations match SO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CL,53,1865405,1 RIO,20,1108363,-1 ZTS,60,1775801,12 CNI,26,1605797,-3 Average,39.75,1588842,2.25 [/table]
As you can see these stocks had an average of 39.75 hedge funds with bullish positions and the average amount invested in these stocks was $1589 million. That figure was $810 million in SO's case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 20 bullish hedge fund positions. The Southern Company (NYSE:SO) 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 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 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately SO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SO investors were disappointed as the stock returned 6.7% during the second quarter 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.
