Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Allegheny Technologies Incorporated (NYSE:ATI).
Allegheny Technologies Incorporated (NYSE:ATI) shareholders have witnessed a decrease in support from the world's most elite money managers recently. Our calculations also showed that ATI isn't among the 30 most popular stocks among hedge funds.
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 market by 32 percentage points since May 2014 through March 12, 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let's take a look at the new hedge fund action encompassing Allegheny Technologies Incorporated (NYSE:ATI).
How are hedge funds trading Allegheny Technologies Incorporated (NYSE:ATI)?
At Q4's end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in ATI over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Ashler Capital was the largest shareholder of Allegheny Technologies Incorporated (NYSE:ATI), with a stake worth $66.6 million reported as of the end of September. Trailing Ashler Capital was Water Street Capital, which amassed a stake valued at $63.5 million. Fisher Asset Management, GAMCO Investors, and Royce & Associates were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Allegheny Technologies Incorporated (NYSE:ATI) has experienced bearish sentiment from the smart money, we can see that there were a few money managers who were dropping their entire stakes heading into Q3. At the top of the heap, Mark Kingdon's Kingdon Capital cut the biggest stake of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $16.7 million in stock. Robert Polak's fund, Anchor Bolt Capital, also said goodbye to its stock, about $9.1 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds heading into Q3.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Allegheny Technologies Incorporated (NYSE:ATI) but similarly valued. We will take a look at Owens-Illinois Inc (NYSE:OI), CommVault Systems, Inc. (NASDAQ:CVLT), Rexford Industrial Realty Inc (NYSE:REXR), and National General Holdings Corp (NASDAQ:NGHC). All of these stocks' market caps match ATI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OI,21,350797,4 CVLT,23,359636,1 REXR,18,284812,5 NGHC,16,219095,5 Average,19.5,303585,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $304 million. That figure was $271 million in ATI's case. CommVault Systems, Inc. (NASDAQ:CVLT) is the most popular stock in this table. On the other hand National General Holdings Corp (NASDAQ:NGHC) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Allegheny Technologies Incorporated (NYSE:ATI) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on ATI, though not to the same extent, as the stock returned 17.1% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.