Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 20% in 2019 (through September 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 24% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Alamos Gold Inc (NYSE:AGI).
Hedge fund interest in Alamos Gold Inc (NYSE:AGI) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AGI to other stocks including Quidel Corporation (NASDAQ:QDEL), National Vision Holdings, Inc. (NASDAQ:EYE), and Core Laboratories N.V. (NYSE:CLB) to get a better sense of its popularity. Our calculations also showed that Alamos Gold isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 40 percentage points since May 2014 through May 30, 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's check out the new hedge fund action encompassing Alamos Gold Inc (NYSE:AGI).
What does smart money think about Alamos Gold Inc (NYSE:AGI)?
Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in AGI a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
The largest stake in Alamos Gold Inc (NYSE:AGI) was held by Renaissance Technologies, which reported holding $49.7 million worth of stock at the end of March. It was followed by Sun Valley Gold with a $37.4 million position. Other investors bullish on the company included Royce & Associates, Polar Capital, and Arrowstreet Capital.
Because Alamos Gold Inc (NYSE:AGI) has experienced a decline in interest from the smart money, it's easy to see that there was a specific group of money managers who were dropping their entire stakes heading into Q3. At the top of the heap, Sander Gerber's Hudson Bay Capital Management said goodbye to the largest stake of all the hedgies followed by Insider Monkey, comprising close to $1.3 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also said goodbye to its stock, about $0.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Alamos Gold Inc (NYSE:AGI) but similarly valued. These stocks are Quidel Corporation (NASDAQ:QDEL), National Vision Holdings, Inc. (NASDAQ:EYE), Core Laboratories N.V. (NYSE:CLB), and Patterson-UTI Energy, Inc. (NASDAQ:PTEN). This group of stocks' market valuations resemble AGI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position QDEL,14,91509,-4 EYE,21,415880,5 CLB,21,244121,6 PTEN,25,289200,-9 Average,20.25,260178,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $260 million. That figure was $169 million in AGI's case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand Quidel Corporation (NASDAQ:QDEL) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Alamos Gold Inc (NYSE:AGI) is even less popular than QDEL. Hedge funds dodged a bullet by taking a bearish stance towards AGI. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AGI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AGI investors were disappointed as the stock returned -4% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.