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Keeping Up with the Smart Money

By Ari Charney on May 19, 2017

A political reporter recently lamented that while he needs to keep up with the news to do his job, all the fast-breaking news of late has been getting in the way of doing his job.

As someone who writes about the market for a living, I can certainly sympathize. While the pace of breaking political news may have accelerated recently, the market is constantly generating more news.

Indeed, on those rare days when there’s time to do so, I can spend up to an hour-and-a-half trying to digest all the news about the sectors that I cover, as well as the broad market and the economy.

But ultimately, when it comes to selecting new investments or tending to existing holdings, I try to tune out the noise from the market and keep my own counsel.

Nevertheless, I still believe it’s worth being aware of what other investors are doing, especially those who are putting their own money on the line and not just running their mouths.

As such, every now and then, I fire up our trusty Bloomberg terminal and take a look at what the smart money is doing. This type of review occasionally uncovers new ideas, but can also help confirm investment theses or reveal sector trends.

To this end, in the next issue of Investing Daily’s Utility Forecaster, I’ll be examining our coverage universe from the perspective of the smart-money set.

Though some longtime investors might have a narrower definition of what constitutes the smart money, for my purpose it’s mutual fund managers, institutional investors, Wall Street analysts, and corporate insiders.

Thanks to data aggregators such as Morningstar and Bloomberg, I’m able to develop a snapshot of smart-money sentiment toward just about any stock.

Fund managers and institutional investors must disclose their portfolio holdings on a quarterly basis. Wall Street analysts are constantly tweaking their recommendations (and discounted cash flow models). And corporate insiders are required to regularly report their transactions as well.

Additionally, I’m thinking of adding hedge funds to the mix. That’s partly inspired by my colleague, Jim Fink, who used to write a recurring feature for Investing Daily’s Stocks to Watch called “13F Filings: Superstar Investors’ Buys and Sells.”

The SEC requires institutional money managers with more than $100 million of assets under management to disclose their holdings as of each quarter’s end within 45 days. Each quarter, Jim would pore over the 13F filings of his favorite hedge-fund managers to uncover new ideas.

Now, a stodgy sector such as utilities doesn’t attract the same attention from the hedge-fund crowd as other areas of the market. Indeed, utilities accounted for a paltry 1.7% of hedge funds’ total allocations as of the end of the first quarter, or about half the sector’s weight in the S&P 500 Index.

Still, there are insights to be gleaned nonetheless.

The biggest takeaway is that hedge funds share private equity’s interest in beaten-down independent power producers, such as NRG Energy Inc. (NYSE: NRG) and AES Corp. (NYSE: AES), among others.

Even so, mostly regulated utilities such as American Electric Power Co. Inc. (NYSE: AEP) and NextEra Energy Inc. (NYSE: NEE) remain hedge funds’ biggest utility-sector holdings by far.

But during the first quarter, hedge funds boosted their bets on beleaguered NRG by more than 50%.

The wholesale power producer was recently targeted by billionaire Paul Singer, whose Elliott Management Corp. has teamed with Bluescape Energy Partners to try to engineer a turnaround at the troubled firm. Together, they held about 8.6% of NRG’s shares outstanding as of the end of the first quarter.

Among the recent initiatives being considered by NRG at their urging is the sale of the company’s entire renewable-energy business, which has about 5,000 megawatts of nameplate generating capacity, as well as the divestiture of certain conventional coal- and gas-fired generating assets in the Southeast.

Meanwhile, NRG’s GenOn Energy Inc. unit, which it acquired in a $4.2 billion deal back in 2012, is trying to avert bankruptcy via a debt restructuring.

That’s a lot of drama. And it’s one of the many reasons why we’ve been steering clear of independent power producers.

As risk-averse income investors, our attitude is to let deep-pocketed hedge funders and private-equity players try to wring money from these debt-laden firms. We’re content to watch from the sidelines.

Though NRG may not be suitable for us at the moment, we’ll continue reviewing 13F filings for other ideas in preparation for the next issue of Utility Forecaster.

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