In this article we will check out the progression of hedge fund sentiment towards Energy Transfer L.P. (NYSE:ET) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is Energy Transfer L.P. (NYSE:ET) the right pick for your portfolio? Money managers were turning bullish. The number of long hedge fund positions rose by 4 recently. Energy Transfer L.P. (NYSE:ET) was in 29 hedge funds' portfolios at the end of June. The all time high for this statistic is 36. Our calculations also showed that ET isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 25 hedge funds in our database with ET holdings at the end of March.
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 S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
David Abrams of Abrams Capital Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's analyze the latest hedge fund action surrounding Energy Transfer L.P. (NYSE:ET).
Do Hedge Funds Think ET Is A Good Stock To Buy Now?
At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ET over the last 24 quarters. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
The largest stake in Energy Transfer L.P. (NYSE:ET) was held by Abrams Capital Management, which reported holding $235.2 million worth of stock at the end of June. It was followed by Appaloosa Management LP with a $113 million position. Other investors bullish on the company included Miller Value Partners, Omega Advisors, and Zimmer Partners. In terms of the portfolio weights assigned to each position Heronetta Management allocated the biggest weight to Energy Transfer L.P. (NYSE:ET), around 7.1% of its 13F portfolio. Abrams Capital Management is also relatively very bullish on the stock, dishing out 5.23 percent of its 13F equity portfolio to ET.
As aggregate interest increased, specific money managers have been driving this bullishness. Highland Capital Management, managed by James Dondero, established the largest position in Energy Transfer L.P. (NYSE:ET). Highland Capital Management had $16.9 million invested in the company at the end of the quarter. Quincy Lee's Ancient Art (Teton Capital) also made a $11.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Jerome L. Simon's Lonestar Capital Management, Himanshu Gulati's Antara Capital, and Peter Galgay's Amitell Capital.
Let's go over hedge fund activity in other stocks similar to Energy Transfer L.P. (NYSE:ET). These stocks are Nucor Corporation (NYSE:NUE), Seagen Inc. (NASDAQ:SGEN), The Kroger Co. (NYSE:KR), State Street Corporation (NYSE:STT), Keysight Technologies Inc (NYSE:KEYS), AMC Entertainment Holdings Inc (NYSE:AMC), and Zebra Technologies Corporation (NASDAQ:ZBRA). This group of stocks' market valuations are similar to ET's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NUE,32,196463,7 SGEN,37,8709980,-2 KR,39,3562302,4 STT,37,1116646,5 KEYS,32,553842,0 AMC,21,404312,2 ZBRA,34,1206955,-1 Average,33.1,2250071,2.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.1 hedge funds with bullish positions and the average amount invested in these stocks was $2250 million. That figure was $835 million in ET's case. The Kroger Co. (NYSE:KR) is the most popular stock in this table. On the other hand AMC Entertainment Holdings Inc (NYSE:AMC) is the least popular one with only 21 bullish hedge fund positions. Energy Transfer L.P. (NYSE:ET) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ET is 55.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and surpassed the market again by 4.5 percentage points. Unfortunately ET wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); ET investors were disappointed as the stock returned -4.4% since the end of June (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.
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Disclosure: None. This article was originally published at Insider Monkey.