Were Hedge Funds Right About CMS Energy Corporation (CMS) ?

Abigail Fisher

Sun, Mar 31, 2019, 6:51 PM

"Value has performed relatively poorly since the 2017 shift, but we believe challenges to the S&P 500’s dominance are mounting and resulting active opportunities away from the index are growing. At some point, this fault line will break, likely on the back of rising rates, and all investors will be reminded that the best time to diversify away from the winners is when it is most painful. The bargain of capturing long-term value may be short-term pain, but enough is eventually enough and it comes time to harvest the benefits.," said Clearbridge Investments in its market commentary. We aren't sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on CMS Energy Corporation (NYSE:CMS) in order to identify whether reputable and successful top money managers continue to believe in its potential.

CMS Energy Corporation (NYSE:CMS) was in 21 hedge funds' portfolios at the end of the fourth quarter of 2018. CMS investors should pay attention to a decrease in enthusiasm from smart money of late. There were 22 hedge funds in our database with CMS positions at the end of the previous quarter. Our calculations also showed that CMS isn't among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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.

Let's take a look at the new hedge fund action encompassing CMS Energy Corporation (NYSE:CMS).

How have hedgies been trading CMS Energy Corporation (NYSE:CMS)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the second quarter of 2018. On the other hand, there were a total of 21 hedge funds with a bullish position in CMS a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

The largest stake in CMS Energy Corporation (NYSE:CMS) was held by Renaissance Technologies, which reported holding $171 million worth of stock at the end of September. It was followed by Millennium Management with a $43 million position. Other investors bullish on the company included AQR Capital Management, Winton Capital Management, and Sanoor Capital.

Seeing as CMS Energy Corporation (NYSE:CMS) has witnessed declining sentiment from the smart money, logic holds that there is a sect of fund managers who sold off their positions entirely by the end of the third quarter. Intriguingly, Phill Gross and Robert Atchinson's Adage Capital Management cut the biggest investment of all the hedgies followed by Insider Monkey, valued at about $17.9 million in stock, and Zilvinas Mecelis's Covalis Capital was right behind this move, as the fund dumped about $9.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as CMS Energy Corporation (NYSE:CMS) but similarly valued. We will take a look at Citizens Financial Group Inc (NYSE:CFG), Regions Financial Corporation (NYSE:RF), WPP plc (NYSE:WPP), and Citrix Systems, Inc. (NASDAQ:CTXS). All of these stocks' market caps match CMS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CFG,43,1363944,1 RF,42,674539,11 WPP,11,53798,3 CTXS,36,1995428,-1 Average,33,1021927,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1022 million. That figure was $340 million in CMS's case. Citizens Financial Group Inc (NYSE:CFG) is the most popular stock in this table. On the other hand WPP plc (NYSE:WPP) is the least popular one with only 11 bullish hedge fund positions. CMS Energy Corporation (NYSE:CMS) 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 CMS wasn't in this group. Hedge funds that bet on CMS were disappointed as the stock returned 12.7% and underperformed 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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