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Hedge Funds Aren’t Crazy About Allegheny Technologies Incorporated (ATI) Anymore

Abigail Fisher

Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Allegheny Technologies Incorporated (NYSE:ATI).

Is Allegheny Technologies Incorporated (NYSE:ATI) a cheap investment right now? Prominent investors are becoming less hopeful. The number of long hedge fund positions fell by 1 recently. Our calculations also showed that ATI 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.

5 Most Popular Stocks Among Hedge Funds

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 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. 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.

[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to view the fresh hedge fund action regarding Allegheny Technologies Incorporated (NYSE:ATI).

How have hedgies been trading Allegheny Technologies Incorporated (NYSE:ATI)?

Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ATI over the last 17 quarters. So, let's see 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, Gilchrist Berg's Water Street Capital has the number one position in Allegheny Technologies Incorporated (NYSE:ATI), worth close to $34.4 million, accounting for 2.7% of its total 13F portfolio. On Water Street Capital's heels is D E Shaw, led by David E. Shaw, holding a $25.9 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other peers that hold long positions consist of Ken Fisher's Fisher Asset Management, Ken Griffin's Citadel Investment Group and Mario Gabelli's GAMCO Investors. In terms of the portfolio weights assigned to each position DC Capital Partners allocated the biggest weight to Allegheny Technologies Incorporated (NYSE:ATI), around 8.89% of its 13F portfolio. Water Street Capital is also relatively very bullish on the stock, designating 2.68 percent of its 13F equity portfolio to ATI.

Judging by the fact that Allegheny Technologies Incorporated (NYSE:ATI) has faced declining sentiment from the smart money, it's easy to see that there was a specific group of money managers that decided to sell off their positions entirely by the end of the third quarter. Interestingly, David Cohen and Harold Levy's Iridian Asset Management sold off the largest position of the "upper crust" of funds tracked by Insider Monkey, totaling about $90.8 million in stock, and Don Morgan's Brigade Capital was right behind this move, as the fund sold off about $17.6 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Allegheny Technologies Incorporated (NYSE:ATI) but similarly valued. These stocks are Immunomedics, Inc. (NASDAQ:IMMU), WW International, Inc. (NASDAQ:WW), Quidel Corporation (NASDAQ:QDEL), and International Bancshares Corp (NASDAQ:IBOC). This group of stocks' market caps match ATI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IMMU,20,537294,-1 WW,28,537184,7 QDEL,14,77704,0 IBOC,16,161597,-2 Average,19.5,328445,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $328 million. That figure was $156 million in ATI's case. WW International, Inc. (NASDAQ:WW) 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. Allegheny Technologies Incorporated (NYSE:ATI) 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 ATI as the stock returned 13.9% 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.

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