Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.
Is Alector, Inc. (NASDAQ:ALEC) a bargain? Hedge funds are becoming hopeful. The number of bullish hedge fund positions increased by 12 in recent months. Our calculations also showed that ALEC isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Let's take a look at the recent hedge fund action encompassing Alector, Inc. (NASDAQ:ALEC).
What does smart money think about Alector, Inc. (NASDAQ:ALEC)?
At Q1's end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12 from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ALEC over the last 15 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, OrbiMed Advisors held the most valuable stake in Alector, Inc. (NASDAQ:ALEC), which was worth $246.8 million at the end of the first quarter. On the second spot was Deerfield Management which amassed $36.6 million worth of shares. Moreover, RA Capital Management, Highline Capital Management, and Millennium Management were also bullish on Alector, Inc. (NASDAQ:ALEC), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, key hedge funds were leading the bulls' herd. OrbiMed Advisors, managed by Samuel Isaly, established the most valuable position in Alector, Inc. (NASDAQ:ALEC). OrbiMed Advisors had $246.8 million invested in the company at the end of the quarter. James E. Flynn's Deerfield Management also made a $36.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Kolchinsky's RA Capital Management, Jacob Doft's Highline Capital Management, and Israel Englander's Millennium Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Alector, Inc. (NASDAQ:ALEC) but similarly valued. We will take a look at Stratasys, Ltd. (NASDAQ:SSYS), OneSmart International Education Group Limited (NYSE:ONE), Bright Scholar Education Holdings Limited (NYSE:BEDU), and Oxford Industries, Inc. (NYSE:OXM). This group of stocks' market values are closest to ALEC's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SSYS,14,137475,0 ONE,6,42937,-1 BEDU,9,85774,1 OXM,11,67701,2 Average,10,83472,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $83 million. That figure was $358 million in ALEC's case. Stratasys, Ltd. (NASDAQ:SSYS) is the most popular stock in this table. On the other hand OneSmart International Education Group Limited (NYSE:ONE) is the least popular one with only 6 bullish hedge fund positions. Alector, Inc. (NASDAQ:ALEC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ALEC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ALEC were disappointed as the stock returned 2.1% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.