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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Allegion plc (NYSE:ALLE)? The smart money sentiment can provide an answer to this question.
Is ALLE a good stock to buy? Allegion plc (NYSE:ALLE) was in 32 hedge funds' portfolios at the end of September. The all time high for this statistic is 36. ALLE investors should pay attention to an increase in hedge fund sentiment recently. There were 29 hedge funds in our database with ALLE holdings at the end of June. Our calculations also showed that ALLE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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 stocks that are in our short portfolio.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. 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 website. With all of this in mind let's review the key hedge fund action regarding Allegion plc (NYSE:ALLE).
Do Hedge Funds Think ALLE Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the second quarter of 2020. By comparison, 28 hedge funds held shares or bullish call options in ALLE a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
Among these funds, Ako Capital held the most valuable stake in Allegion plc (NYSE:ALLE), which was worth $199.4 million at the end of the third quarter. On the second spot was Intermede Investment Partners which amassed $84.8 million worth of shares. Arrowstreet Capital, Bristol Gate Capital Partners, and Balyasny Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Iszo Capital allocated the biggest weight to Allegion plc (NYSE:ALLE), around 5.83% of its 13F portfolio. Albar Capital is also relatively very bullish on the stock, dishing out 5.83 percent of its 13F equity portfolio to ALLE.
As industrywide interest jumped, some big names have been driving this bullishness. Iszo Capital, managed by Brian Sheehy, initiated the most valuable position in Allegion plc (NYSE:ALLE). Iszo Capital had $11.7 million invested in the company at the end of the quarter. Javier Velazquez's Albar Capital also initiated a $11.7 million position during the quarter. The other funds with brand new ALLE positions are Alec Litowitz and Ross Laser's Magnetar Capital, Donald Sussman's Paloma Partners, and Michael Gelband's ExodusPoint Capital.
Let's also examine hedge fund activity in other stocks similar to Allegion plc (NYSE:ALLE). We will take a look at Universal Health Services, Inc. (NYSE:UHS), IPG Photonics Corporation (NASDAQ:IPGP), WestRock Company (NYSE:WRK), Caesars Entertainment Inc. (NASDAQ:CZR), The Toro Company (NYSE:TTC), American Homes 4 Rent (NYSE:AMH), and Neurocrine Biosciences, Inc. (NASDAQ:NBIX). This group of stocks' market caps are closest to ALLE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UHS,34,380704,-4 IPGP,24,291440,-6 WRK,32,502482,0 CZR,74,1856850,24 TTC,32,959661,1 AMH,24,294356,1 NBIX,38,1005157,0 Average,36.9,755807,2.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36.9 hedge funds with bullish positions and the average amount invested in these stocks was $756 million. That figure was $541 million in ALLE's case. Caesars Entertainment Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand IPG Photonics Corporation (NASDAQ:IPGP) is the least popular one with only 24 bullish hedge fund positions. Allegion plc (NYSE:ALLE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ALLE is 42.7. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. A small number of hedge funds were also right about betting on ALLE as the stock returned 15.3% since the end of the third quarter (through 12/18) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.