Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 835 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their December 31 holdings, data that is available nowhere else. Should you consider Alcon Inc. (NYSE:ALC) for your portfolio? We'll look to this invaluable collective wisdom for the answer.
Alcon Inc. (NYSE:ALC) shares haven't seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 24 hedge funds' portfolios at the end of the fourth quarter of 2019. At the end of this article we will also compare ALC to other stocks including Motorola Solutions Inc (NYSE:MSI), Eversource Energy (NYSE:ES), and Nutrien Ltd. (NYSE:NTR) to get a better sense of its popularity.
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 S&P 500 ETFs by more than 41 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 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_728785" align="aligncenter" width="400"] Jeffrey Gates of Gates Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind we're going to view the recent hedge fund action regarding Alcon Inc. (NYSE:ALC).
Hedge fund activity in Alcon Inc. (NYSE:ALC)
At Q4's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ALC over the last 18 quarters. So, let's review 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, Ako Capital, managed by Nicolai Tangen, holds the number one position in Alcon Inc. (NYSE:ALC). Ako Capital has a $159 million position in the stock, comprising 3.4% of its 13F portfolio. Coming in second is Gates Capital Management, led by Jeffrey Gates, holding a $82.5 million position; the fund has 3.6% of its 13F portfolio invested in the stock. Some other peers that are bullish encompass Roberto Mignone's Bridger Management, D. E. Shaw's D E Shaw and John Brennan's Sirios Capital Management. In terms of the portfolio weights assigned to each position Bridger Management allocated the biggest weight to Alcon Inc. (NYSE:ALC), around 5.8% of its 13F portfolio. Clearfield Capital is also relatively very bullish on the stock, earmarking 4.49 percent of its 13F equity portfolio to ALC.
Because Alcon Inc. (NYSE:ALC) has faced a decline in interest from the aggregate hedge fund industry, we can see that there were a few hedgies who were dropping their full holdings in the third quarter. Intriguingly, Nicolai Tangen's Ako Capital dumped the biggest investment of the 750 funds followed by Insider Monkey, valued at an estimated $123.1 million in stock. Arthur B Cohen and Joseph Healey's fund, Healthcor Management LP, also dumped its stock, about $32.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine 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 Motorola Solutions Inc (NYSE:MSI), Eversource Energy (NYSE:ES), Nutrien Ltd. (NYSE:NTR), and Cummins Inc. (NYSE:CMI). This group of stocks' market values match ALC's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MSI,41,560978,4 ES,24,452875,2 NTR,28,408982,0 CMI,39,768817,5 Average,33,547913,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $548 million. That figure was $706 million in ALC's case. Motorola Solutions Inc (NYSE:MSI) is the most popular stock in this table. On the other hand Eversource Energy (NYSE:ES) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Alcon Inc. (NYSE:ALC) is even less popular than ES. Hedge funds clearly dropped the ball on ALC as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on ALC as the stock returned -15.9% during the same time period and outperformed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.