Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Alaska Air Group, Inc. (NYSE:ALK) has seen an increase in hedge fund sentiment lately. ALK was in 31 hedge funds' portfolios at the end of the third quarter of 2019. There were 22 hedge funds in our database with ALK holdings at the end of the previous quarter. Our calculations also showed that ALK 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.
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 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.
[caption id="attachment_747408" align="aligncenter" width="473"] Paul Reeder of PAR Capital Management[/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. Let's take a gander at the recent hedge fund action regarding Alaska Air Group, Inc. (NYSE:ALK).
How have hedgies been trading Alaska Air Group, Inc. (NYSE:ALK)?
Heading into the fourth quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 41% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ALK over the last 17 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
Among these funds, PAR Capital Management held the most valuable stake in Alaska Air Group, Inc. (NYSE:ALK), which was worth $175.9 million at the end of the third quarter. On the second spot was Diamond Hill Capital which amassed $136.2 million worth of shares. Millennium Management, Greenhouse Funds, and Point72 Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Greenhouse Funds allocated the biggest weight to Alaska Air Group, Inc. (NYSE:ALK), around 4.19% of its portfolio. Albar Capital is also relatively very bullish on the stock, earmarking 3.44 percent of its 13F equity portfolio to ALK.
As aggregate interest increased, key hedge funds were breaking ground themselves. Renaissance Technologies, assembled the largest position in Alaska Air Group, Inc. (NYSE:ALK). Renaissance Technologies had $10.8 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also initiated a $8.5 million position during the quarter. The following funds were also among the new ALK investors: Noam Gottesman's GLG Partners, Sara Nainzadeh's Centenus Global Management, and David E. Shaw's D E Shaw.
Let's check out hedge fund activity in other stocks similar to Alaska Air Group, Inc. (NYSE:ALK). We will take a look at Pilgrim's Pride Corporation (NASDAQ:PPC), ICON Public Limited Company (NASDAQ:ICLR), Euronet Worldwide, Inc. (NASDAQ:EEFT), and Invesco Ltd. (NYSE:IVZ). All of these stocks' market caps are closest to ALK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PPC,24,264319,5 ICLR,20,613069,1 EEFT,35,322755,2 IVZ,24,198236,4 Average,25.75,349595,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $350 million. That figure was $486 million in ALK's case. Euronet Worldwide, Inc. (NASDAQ:EEFT) is the most popular stock in this table. On the other hand ICON Public Limited Company (NASDAQ:ICLR) is the least popular one with only 20 bullish hedge fund positions. Alaska Air Group, Inc. (NYSE:ALK) 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 ALK, though not to the same extent, as the stock returned 6.8% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.