Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Alamo Group, Inc. (NYSE:ALG).
Alamo Group, Inc. (NYSE:ALG) has experienced an increase in enthusiasm from smart money of late. Our calculations also showed that ALG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
According to most traders, hedge funds are seen as slow, old financial tools of yesteryear. While there are more than 8000 funds with their doors open today, We choose to focus on the moguls of this group, approximately 750 funds. These investment experts shepherd bulk of the hedge fund industry's total capital, and by keeping an eye on their first-class stock picks, Insider Monkey has deciphered several investment strategies that have historically outrun Mr. Market. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
[caption id="attachment_758450" align="aligncenter" width="450"] Martin Whitman of Third Avenue Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the latest hedge fund action encompassing Alamo Group, Inc. (NYSE:ALG).
Hedge fund activity in Alamo Group, Inc. (NYSE:ALG)
At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 43% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ALG over the last 17 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, James A. Star's Longview Asset Management has the biggest position in Alamo Group, Inc. (NYSE:ALG), worth close to $200.1 million, amounting to 3.1% of its total 13F portfolio. The second largest stake is held by Third Avenue Management, led by Martin Whitman, holding a $5.5 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions encompass Chuck Royce's Royce & Associates, Israel Englander's Millennium Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Longview Asset Management allocated the biggest weight to Alamo Group, Inc. (NYSE:ALG), around 3.13% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, earmarking 0.5 percent of its 13F equity portfolio to ALG.
Consequently, some big names have jumped into Alamo Group, Inc. (NYSE:ALG) headfirst. Holocene Advisors, managed by Brandon Haley, assembled the most outsized position in Alamo Group, Inc. (NYSE:ALG). Holocene Advisors had $0.7 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also initiated a $0.4 million position during the quarter. The other funds with new positions in the stock are Cliff Asness's AQR Capital Management and Michael Gelband's ExodusPoint Capital.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Alamo Group, Inc. (NYSE:ALG) but similarly valued. We will take a look at TriMas Corp (NASDAQ:TRS), Employers Holdings, Inc. (NYSE:EIG), Marcus & Millichap Inc (NYSE:MMI), and Oi SA (NYSE:OIBR). This group of stocks' market caps match ALG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRS,14,110541,-1 EIG,14,76306,-2 MMI,14,111080,2 OIBR,11,291042,-7 Average,13.25,147242,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $147 million. That figure was $217 million in ALG's case. TriMas Corp (NASDAQ:TRS) is the most popular stock in this table. On the other hand Oi SA (NYSE:OIBR) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Alamo Group, Inc. (NYSE:ALG) is even less popular than OIBR. Hedge funds dodged a bullet by taking a bearish stance towards ALG. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ALG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ALG investors were disappointed as the stock returned -2.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.