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Hedge Fund Favorites vs. Align Technology, Inc. (ALGN) In 2019

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Align Technology, Inc. (NASDAQ:ALGN).

Align Technology, Inc. (NASDAQ:ALGN) investors should be aware of a decrease in hedge fund sentiment in recent months. Our calculations also showed that ALGN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]

RENAISSANCE TECHNOLOGIES

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind we're going to take a look at the recent hedge fund action encompassing Align Technology, Inc. (NASDAQ:ALGN).

What have hedge funds been doing with Align Technology, Inc. (NASDAQ:ALGN)?

At Q3's end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ALGN over the last 17 quarters. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Is ALGN A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Renaissance Technologies, holds the biggest position in Align Technology, Inc. (NASDAQ:ALGN). Renaissance Technologies has a $400.9 million position in the stock, comprising 0.3% of its 13F portfolio. The second most bullish fund manager is Hillhouse Capital Management, managed by Lei Zhang, which holds a $283.2 million position; the fund has 3.9% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism contain Brian Bares's Bares Capital Management, Andreas Halvorsen's Viking Global and Ken Fisher's Fisher Asset Management. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Align Technology, Inc. (NASDAQ:ALGN), around 5.7% of its 13F portfolio. Consonance Capital Management is also relatively very bullish on the stock, setting aside 5.35 percent of its 13F equity portfolio to ALGN.

Judging by the fact that Align Technology, Inc. (NASDAQ:ALGN) has witnessed bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of fund managers who sold off their entire stakes by the end of the third quarter. Intriguingly, Gabriel Plotkin's Melvin Capital Management dropped the biggest investment of the 750 funds monitored by Insider Monkey, comprising an estimated $68.4 million in stock, and Arthur B Cohen and Joseph Healey's Healthcor Management was right behind this move, as the fund dumped about $56.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 7 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Align Technology, Inc. (NASDAQ:ALGN). These stocks are MGM Resorts International (NYSE:MGM), ArcelorMittal (NYSE:MT), Quest Diagnostics Incorporated (NYSE:DGX), and SK Telecom Co., Ltd. (NYSE:SKM). All of these stocks' market caps are similar to ALGN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGM,48,2194471,13 MT,14,192839,-1 DGX,33,561377,9 SKM,6,42756,-1 Average,25.25,747861,5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $748 million. That figure was $1497 million in ALGN's case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 6 bullish hedge fund positions. Align Technology, Inc. (NASDAQ:ALGN) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ALGN, though not to the same extent, as the stock returned 32.8% during 2019 (as of 12/23) and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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