"The end to the U.S. Government shutdown, reports of progress on China-U.S. trade talks, and the Federal Reserve’s confirmation that it did not plan further interest rate hikes in 2019 allayed investor fears and drove U.S. markets substantially higher in the first quarter of the year. Global markets followed suit pretty much across the board delivering what some market participants described as a “V-shaped” recovery," This is how Evermore Global Value summarized the first quarter in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.
Allot Ltd. (NASDAQ:ALLT) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of March. At the end of this article we will also compare ALLT to other stocks including Strongbridge Biopharma plc (NASDAQ:SBBP), Xeris Pharmaceuticals, Inc. (NASDAQ:XERS), and Eiger BioPharmaceuticals, Inc. (NASDAQ:EIGR) 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_746830" align="aligncenter" width="473"] Matthew Hulsizer of PEAK6 Capital[/caption]
Let's take a glance at the new hedge fund action encompassing Allot Ltd. (NASDAQ:ALLT).
Hedge fund activity in Allot Ltd. (NASDAQ:ALLT)
At the end of the first quarter, a total of 10 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 ALLT over the last 15 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Lynrock Lake held the most valuable stake in Allot Ltd. (NASDAQ:ALLT), which was worth $28.7 million at the end of the first quarter. On the second spot was Renaissance Technologies which amassed $14.5 million worth of shares. Moreover, P.A.W. CAPITAL PARTNERS, Rima Senvest Management, and PEAK6 Capital Management were also bullish on Allot Ltd. (NASDAQ:ALLT), allocating a large percentage of their portfolios to this stock.
Seeing as Allot Ltd. (NASDAQ:ALLT) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of funds that elected to cut their full holdings last quarter. Intriguingly, George Soros's Soros Fund Management cut the biggest investment of the "upper crust" of funds tracked by Insider Monkey, comprising close to $19.8 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund cut about $0.1 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Allot Ltd. (NASDAQ:ALLT). We will take a look at Strongbridge Biopharma plc (NASDAQ:SBBP), Xeris Pharmaceuticals, Inc. (NASDAQ:XERS), Eiger BioPharmaceuticals, Inc. (NASDAQ:EIGR), and Preformed Line Products Company (NASDAQ:PLPC). All of these stocks' market caps resemble ALLT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBBP,15,62949,1 XERS,7,56936,4 EIGR,22,166729,1 PLPC,7,31280,2 Average,12.75,79474,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $79 million. That figure was $55 million in ALLT's case. Eiger BioPharmaceuticals, Inc. (NASDAQ:EIGR) is the most popular stock in this table. On the other hand Xeris Pharmaceuticals, Inc. (NASDAQ:XERS) is the least popular one with only 7 bullish hedge fund positions. Allot Ltd. (NASDAQ:ALLT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ALLT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ALLT investors were disappointed as the stock returned -11.1% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.