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Hedge Funds Are Selling Allison Transmission Holdings Inc (ALSN)

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Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Allison Transmission Holdings Inc (NYSE:ALSN).

Allison Transmission Holdings Inc (NYSE:ALSN) investors should pay attention to a decrease in enthusiasm from smart money in recent months. Allison Transmission Holdings Inc (NYSE:ALSN) was in 23 hedge funds' portfolios at the end of June. The all time high for this statistic is 40. There were 30 hedge funds in our database with ALSN holdings at the end of March. Our calculations also showed that ALSN isn't among the 30 most popular stocks among hedge funds (click 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 S&P 500 ETFs by 79 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.

AQR CAPITAL MANAGEMENT
AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to take a look at the recent hedge fund action surrounding Allison Transmission Holdings Inc (NYSE:ALSN).

Do Hedge Funds Think ALSN Is A Good Stock To Buy Now?

At the end of June, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ALSN over the last 24 quarters. So, let's examine 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, Renaissance Technologies has the most valuable position in Allison Transmission Holdings Inc (NYSE:ALSN), worth close to $183.3 million, amounting to 0.2% of its total 13F portfolio. The second most bullish fund manager is GLG Partners, led by Noam Gottesman, holding a $48.6 million position; 0.2% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions encompass D. E. Shaw's D E Shaw, John Brennan's Sirios Capital Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Sirios Capital Management allocated the biggest weight to Allison Transmission Holdings Inc (NYSE:ALSN), around 2.67% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, designating 0.67 percent of its 13F equity portfolio to ALSN.

Due to the fact that Allison Transmission Holdings Inc (NYSE:ALSN) has faced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there were a few funds that elected to cut their full holdings heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the biggest investment of the "upper crust" of funds watched by Insider Monkey, totaling an estimated $5.5 million in stock. Chuck Royce's fund, Royce & Associates, also dumped its stock, about $1.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 7 funds heading into Q3.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Allison Transmission Holdings Inc (NYSE:ALSN) but similarly valued. These stocks are Commscope Holding Company Inc (NASDAQ:COMM), Ryman Hospitality Properties, Inc. (NYSE:RHP), Certara, Inc. (NASDAQ:CERT), Advanced Energy Industries, Inc. (NASDAQ:AEIS), Resideo Technologies, Inc. (NYSE:REZI), Wintrust Financial Corporation (NASDAQ:WTFC), and Healthcare Realty Trust Inc (NYSE:HR). This group of stocks' market values are similar to ALSN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COMM,36,1024585,4 RHP,22,342352,0 CERT,7,124316,-5 AEIS,17,74181,-6 REZI,28,682954,1 WTFC,18,222826,-1 HR,19,186785,-1 Average,21,379714,-1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $380 million. That figure was $390 million in ALSN's case. Commscope Holding Company Inc (NASDAQ:COMM) is the most popular stock in this table. On the other hand Certara, Inc. (NASDAQ:CERT) is the least popular one with only 7 bullish hedge fund positions. Allison Transmission Holdings Inc (NYSE:ALSN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ALSN is 42.8. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and beat the market again by 1.6 percentage points. Unfortunately ALSN wasn't nearly as popular as these 5 stocks and hedge funds that were betting on ALSN were disappointed as the stock returned -12.6% since the end of June (through 10/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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