At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Alcon Inc. (NYSE:ALC) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Alcon Inc. (NYSE:ALC) a superb stock to buy now? Investors who are in the know were taking a pessimistic view. The number of bullish hedge fund bets dropped by 4 in recent months. Alcon Inc. (NYSE:ALC) was in 21 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. Our calculations also showed that ALC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 25 hedge funds in our database with ALC positions at the end of the first quarter. Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Roberto Mignone of Bridger Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Keeping this in mind we're going to view the new hedge fund action regarding Alcon Inc. (NYSE:ALC).
How have hedgies been trading Alcon Inc. (NYSE:ALC)?
At Q2's end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from one quarter earlier. On the other hand, there were a total of 18 hedge funds with a bullish position in ALC a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
The largest stake in Alcon Inc. (NYSE:ALC) was held by Ako Capital, which reported holding $183.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $110.5 million position. Other investors bullish on the company included Sirios Capital Management, Bridger Management, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Sirios Capital Management allocated the biggest weight to Alcon Inc. (NYSE:ALC), around 5.2% of its 13F portfolio. Bridger Management is also relatively very bullish on the stock, setting aside 4.5 percent of its 13F equity portfolio to ALC.
Seeing as Alcon Inc. (NYSE:ALC) has experienced bearish sentiment from the smart money, it's safe to say that there lies a certain "tier" of hedge funds who sold off their positions entirely by the end of the second quarter. Interestingly, Jeffrey Gates's Gates Capital Management dumped the largest position of the "upper crust" of funds followed by Insider Monkey, comprising about $32.9 million in stock, and Anna Nikolayevsky's Axel Capital Management was right behind this move, as the fund said goodbye to about $4.1 million worth. These transactions are interesting, as total hedge fund interest was cut by 4 funds by the end of the second quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Alcon Inc. (NYSE:ALC) but similarly valued. We will take a look at CoStar Group Inc (NASDAQ:CSGP), MSCI Inc (NYSE:MSCI), Marriott International Inc (NASDAQ:MAR), ResMed Inc. (NYSE:RMD), SYSCO Corporation (NYSE:SYY), Cintas Corporation (NASDAQ:CTAS), and WEC Energy Group, Inc. (NYSE:WEC). All of these stocks' market caps match ALC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CSGP,50,2267394,10 MSCI,44,729558,15 MAR,48,2159338,1 RMD,25,224162,-8 SYY,42,2177488,7 CTAS,34,531899,-8 WEC,30,290696,1 Average,39,1197219,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1197 million. That figure was $584 million in ALC's case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand ResMed Inc. (NYSE:RMD) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Alcon Inc. (NYSE:ALC) is even less popular than RMD. Our overall hedge fund sentiment score for ALC is 18.2. 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. Hedge funds dodged a bullet by taking a bearish stance towards ALC. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September but managed to beat the market by 19.3 percentage points. Unfortunately ALC wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); ALC investors were disappointed as the stock returned -0.6% in 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
Get real-time email alerts: Follow Alcon Inc (NYSE:ALC)
Disclosure: None. This article was originally published at Insider Monkey.