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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Allegion plc (NYSE:ALLE).
Allegion plc (NYSE:ALLE) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 27 hedge funds' portfolios at the end of March. Our calculations also showed that ALLE isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare ALLE to other stocks including Newell Brands Inc. (NYSE:NWL), LPL Financial Holdings Inc (NASDAQ:LPLA), and Westlake Chemical Corporation (NYSE:WLK) 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 S&P 500 ETFs by 115 percentage points since March 2017 (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.
Israel Englander of Millennium Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we're going to take a look at the key hedge fund action regarding Allegion plc (NYSE:ALLE).
Do Hedge Funds Think ALLE Is A Good Stock To Buy Now?
At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ALLE over the last 23 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
Among these funds, Ako Capital held the most valuable stake in Allegion plc (NYSE:ALLE), which was worth $323.6 million at the end of the fourth quarter. On the second spot was Intermede Investment Partners which amassed $132.8 million worth of shares. Millennium Management, Citadel Investment Group, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Allegion plc (NYSE:ALLE), around 4.58% of its 13F portfolio. Cartenna Capital is also relatively very bullish on the stock, setting aside 4.44 percent of its 13F equity portfolio to ALLE.
Since Allegion plc (NYSE:ALLE) has witnessed bearish sentiment from the smart money, we can see that there exists a select few fund managers who sold off their positions entirely heading into Q2. At the top of the heap, Paul Marshall and Ian Wace's Marshall Wace LLP cut the largest stake of all the hedgies followed by Insider Monkey, valued at an estimated $10.2 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also cut its stock, about $8.4 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to Allegion plc (NYSE:ALLE). We will take a look at Newell Brands Inc. (NYSE:NWL), LPL Financial Holdings Inc (NASDAQ:LPLA), Westlake Chemical Corporation (NYSE:WLK), Universal Health Services, Inc. (NYSE:UHS), Lamb Weston Holdings, Inc. (NYSE:LW), IPG Photonics Corporation (NASDAQ:IPGP), and Bausch Health Companies (NYSE:BHC). This group of stocks' market caps are similar to ALLE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NWL,24,1952399,1 LPLA,38,1496713,-5 WLK,26,410629,4 UHS,43,882608,4 LW,38,493079,9 IPGP,31,416236,6 BHC,42,4076779,-1 Average,34.6,1389778,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.6 hedge funds with bullish positions and the average amount invested in these stocks was $1390 million. That figure was $969 million in ALLE's case. Universal Health Services, Inc. (NYSE:UHS) is the most popular stock in this table. On the other hand Newell Brands Inc. (NYSE:NWL) is the least popular one with only 24 bullish hedge fund positions. Allegion plc (NYSE:ALLE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ALLE is 35.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through July 9th and beat the market by 6.7 percentage points. A small number of hedge funds were also right about betting on ALLE, though not to the same extent, as the stock returned 10.4% since the end of Q1 (through July 9th) and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.