"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Alimera Sciences Inc (NASDAQ:ALIM) and see how it was affected.
Alimera Sciences Inc (NASDAQ:ALIM) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare ALIM to other stocks including Quorum Health Corporation (NYSE:QHC), Nautilus, Inc. (NYSE:NLS), and RCM Technologies, Inc. (NASDAQ:RCMT) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_758402" align="aligncenter" width="450"] William Leland Edwards of Palo Alto Investors[/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. Let's analyze the new hedge fund action surrounding Alimera Sciences Inc (NASDAQ:ALIM).
Hedge fund activity in Alimera Sciences Inc (NASDAQ:ALIM)
At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 10 hedge funds with a bullish position in ALIM a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in Alimera Sciences Inc (NASDAQ:ALIM) was held by Deerfield Management, which reported holding $4 million worth of stock at the end of September. It was followed by venBio Select Advisor with a $3.5 million position. Other investors bullish on the company included Armistice Capital, Palo Alto Investors, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Armistice Capital allocated the biggest weight to Alimera Sciences Inc (NASDAQ:ALIM), around 0.22% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, dishing out 0.16 percent of its 13F equity portfolio to ALIM.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Alimera Sciences Inc (NASDAQ:ALIM) but similarly valued. These stocks are Quorum Health Corporation (NYSE:QHC), Nautilus, Inc. (NYSE:NLS), RCM Technologies, Inc. (NASDAQ:RCMT), and Mitcham Industries, Inc. (NASDAQ:MIND). This group of stocks' market valuations are similar to ALIM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position QHC,11,7125,0 NLS,13,6908,-1 RCMT,3,2784,1 MIND,4,10485,1 Average,7.75,6826,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $7 million. That figure was $14 million in ALIM's case. Nautilus, Inc. (NYSE:NLS) is the most popular stock in this table. On the other hand RCM Technologies, Inc. (NASDAQ:RCMT) is the least popular one with only 3 bullish hedge fund positions. Alimera Sciences Inc (NASDAQ:ALIM) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on ALIM as the stock returned 893% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.