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 third 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 9.9 percentage points through the end of November. 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.
Allegion plc (NYSE:ALLE) was in 26 hedge funds' portfolios at the end of the third quarter of 2019. ALLE has seen an increase in support from the world's most elite money managers in recent months. There were 24 hedge funds in our database with ALLE holdings at the end of the previous quarter. Our calculations also showed that ALLE 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_255014" align="aligncenter" width="450"] Clint Carlson of Carlson Capital[/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 analyze the key hedge fund action regarding Allegion plc (NYSE:ALLE).
How are hedge funds trading Allegion plc (NYSE:ALLE)?
At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in ALLE a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Generation Investment Management, managed by David Blood and Al Gore, holds the largest position in Allegion plc (NYSE:ALLE). Generation Investment Management has a $152.5 million position in the stock, comprising 1.1% of its 13F portfolio. Sitting at the No. 2 spot is Intermede Investment Partners, managed by Barry Dargan, which holds a $71.9 million position; 4% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions comprise Israel Englander's Millennium Management, Dmitry Balyasny's Balyasny Asset Management and Clint Carlson's Carlson Capital. In terms of the portfolio weights assigned to each position Intermede Investment Partners allocated the biggest weight to Allegion plc (NYSE:ALLE), around 3.99% of its portfolio. Generation Investment Management is also relatively very bullish on the stock, earmarking 1.08 percent of its 13F equity portfolio to ALLE.
Now, specific money managers have jumped into Allegion plc (NYSE:ALLE) headfirst. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the biggest position in Allegion plc (NYSE:ALLE). Marshall Wace had $13.9 million invested in the company at the end of the quarter. Greg Poole's Echo Street Capital Management also made a $13.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Ken Griffin's Citadel Investment Group, Michael Kharitonov and Jon David McAuliffe's Voleon Capital, and Michael Platt and William Reeves's BlueCrest Capital Mgmt..
Let's now take a look at hedge fund activity in other stocks similar to Allegion plc (NYSE:ALLE). These stocks are Aqua America Inc (NYSE:WTR), StoneCo Ltd. (NASDAQ:STNE), Apache Corporation (NYSE:APA), and United Rentals, Inc. (NYSE:URI). This group of stocks' market caps match ALLE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WTR,33,832797,12 STNE,28,1337452,1 APA,26,692560,4 URI,54,1123521,10 Average,35.25,996583,6.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $997 million. That figure was $450 million in ALLE's case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand Apache Corporation (NYSE:APA) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Allegion plc (NYSE:ALLE) is even less popular than APA. Hedge funds clearly dropped the ball on ALLE as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on ALLE as the stock returned 15.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.