Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
ALLETE Inc (NYSE:ALE) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 18 hedge funds' portfolios at the end of the first quarter of 2019. At the end of this article we will also compare ALE to other stocks including SINA Corp (NASDAQ:SINA), Amneal Pharmaceuticals, Inc. (NYSE:AMRX), and Brighthouse Financial, Inc. (NASDAQ:BHF) to get a better sense of its popularity.
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.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
We're going to review the new hedge fund action surrounding ALLETE Inc (NYSE:ALE).
What does the smart money think about ALLETE Inc (NYSE:ALE)?
At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ALE 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, Renaissance Technologies held the most valuable stake in ALLETE Inc (NYSE:ALE), which was worth $92.1 million at the end of the first quarter. On the second spot was Polaris Capital Management which amassed $52.2 million worth of shares. Moreover, GLG Partners, AQR Capital Management, and Millennium Management were also bullish on ALLETE Inc (NYSE:ALE), allocating a large percentage of their portfolios to this stock.
Since ALLETE Inc (NYSE:ALE) has experienced bearish sentiment from the smart money, it's easy to see that there exists a select few fund managers who sold off their full holdings last quarter. At the top of the heap, Peter Muller's PDT Partners sold off the largest investment of the "upper crust" of funds monitored by Insider Monkey, valued at an estimated $2.1 million in stock, and Daniel Arbess's Perella Weinberg Partners was right behind this move, as the fund dropped about $0.9 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks similar to ALLETE Inc (NYSE:ALE). These stocks are SINA Corp (NASDAQ:SINA), Amneal Pharmaceuticals, Inc. (NYSE:AMRX), Brighthouse Financial, Inc. (NASDAQ:BHF), and Marriott Vacations Worldwide Corporation (NYSE:VAC). This group of stocks' market values resemble ALE's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SINA,24,474870,3 AMRX,8,27694,0 BHF,31,378363,7 VAC,26,399866,0 Average,22.25,320198,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $320 million. That figure was $247 million in ALE's case. Brighthouse Financial, Inc. (NASDAQ:BHF) is the most popular stock in this table. On the other hand Amneal Pharmaceuticals, Inc. (NYSE:AMRX) is the least popular one with only 8 bullish hedge fund positions. ALLETE Inc (NYSE:ALE) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on ALE, though not to the same extent, as the stock returned -1.1% during the same time frame and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.