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Were Hedge Funds Right About Flocking Into Alarm.com Holdings, Inc. (ALRM)?

Nina Todic

Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don't publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That's why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Alarm.com Holdings, Inc. (NASDAQ:ALRM) from the perspective of those elite funds.

Alarm.com Holdings, Inc. (NASDAQ:ALRM) was in 15 hedge funds' portfolios at the end of December. ALRM investors should be aware of an increase in support from the world's most elite money managers recently. There were 12 hedge funds in our database with ALRM holdings at the end of the previous quarter. Our calculations also showed that alrm 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.

Ken Fisher FISHER ASSET MANAGEMENT

We're going to go over the recent hedge fund action regarding Alarm.com Holdings, Inc.(NASDAQ:ALRM).

What have hedge funds been doing with Alarm.com Holdings, Inc. (NASDAQ:ALRM)?

At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from the second quarter of 2018. By comparison, 17 hedge funds held shares or bullish call options in ALRM a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

No of Hedge Funds with ALRM Positions

Among these funds, Bares Capital Management held the most valuable stake in Alarm.com Holdings, Inc. (NASDAQ:ALRM), which was worth $178.6 million at the end of the fourth quarter. On the second spot was Akre Capital Management which amassed $31.2 million worth of shares. Moreover, Greenvale Capital, Fisher Asset Management, and Engle Capital were also bullish on Alarm.com Holdings, Inc. (NASDAQ:ALRM), allocating a large percentage of their portfolios to this stock.

Consequently, some big names were breaking ground themselves. Greenvale Capital, managed by Bruce Emery, assembled the biggest position in Alarm.com Holdings, Inc. (NASDAQ:ALRM). Greenvale Capital had $20 million invested in the company at the end of the quarter. Ken Fisher's Fisher Asset Management also made a $12 million investment in the stock during the quarter. The following funds were also among the new ALRM investors: Ken Griffin's Citadel Investment Group, Steve Cohen's Point72 Asset Management, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's now take a look at hedge fund activity in other stocks similar to Alarm.com Holdings, Inc. (NASDAQ:ALRM). We will take a look at Noah Holdings Limited (NYSE:NOAH), Triton International Limited (NYSE:TRTN), MakeMyTrip Limited (NASDAQ:MMYT), and Murphy USA Inc. (NYSE:MUSA). This group of stocks' market values match ALRM's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NOAH,11,224317,3 TRTN,11,25071,-1 MMYT,11,48024,-1 MUSA,24,150043,5 Average,14.25,111864,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $112 million. That figure was $267 million in ALRM's case. Murphy USA Inc. (NYSE:MUSA) is the most popular stock in this table. On the other hand Noah Holdings Limited (NYSE:NOAH) is the least popular one with only 11 bullish hedge fund positions. Alarm.com Holdings, Inc. (NASDAQ:ALRM) is not the most popular stock in this group but hedge fund interest is still above average. 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 ALRM as the stock returned 32.6% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.

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