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Here’s Why Alger Remains Hopeful in Eargo Inc. (EAR) Despite Performing Poorly in Q2 2021

·4 min read

Alger, an investment management firm, published its “Alger Small Cap Focus Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. During the quarter, the largest portfolio sector weightings were Health Care and Information Technology. The largest sector overweight was Health Care. Class A shares of the Alger Small Cap Focus Fund outperformed the Russell 2000 Growth Index during the second quarter of 2021. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Alger Small Cap Focus Fund, the fund mentioned Eargo, Inc. (NASDAQ: EAR), and discussed its stance on the firm. Eargo, Inc. is a San Jose, California-based hearing aid manufacturer, that currently has a $1.3 billion market capitalization. EAR delivered a -24.03% return since the beginning of the year, while its 3-month returns are up by 4.26%. The stock closed at $34.87 per share on August 11, 2021.

Here is what Alger Small Cap Focus Fund has to say about Eargo, Inc. in its Q2 2021 investor letter:

"Eargo, Inc. was among the top detractors from performance. Eargo introduced its first innovative hearing aid solution into the hearing loss market in 2017 - the first and only virtually invisible, rechargeable, FDA-regulated, completely in-canal device for the treatment of hearing loss, according to the company's Securities and Exchange Commission S-1 filing. Eargo's innovative product and go-to-market approach addresses key pain points of the traditional hearing aid industry that have limited adoption of hearing aids to date, such as accessibility, cost and stigma. The industry generated $8 billion in U.S. hearing aid sales in 2019 and is only 27% penetrated. Eargo had a strong quarter with 74% year over year earnings growth while showing continued improvements in its insurance market, which has less than 2% penetration and a product return rate decreasing to the low 20% rate from the mid-30% rate in 2019. While the company raised its guidance, investors were likely hoping to see a more significant guidance raise. We think management's prudent approach to guidance in its first full year as a public company is appropriate. Furthermore, Eargo falls in the bucket of high-growth, high-multiple stocks and was a beneficiary of Covid-19, which is characteristic of companies that broadly underperformed in the first half of the second quarter."

Hearing aid, Ear
Hearing aid, Ear

Photo by Mark Paton on Unsplash

Based on our calculations, Eargo, Inc. (NASDAQ: EAR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. EAR was in 12 hedge fund portfolios at the end of the first quarter of 2021, compared to 14 funds in the fourth quarter of 2020. Eargo, Inc. (NASDAQ: EAR) delivered a -2.16% return in the past month.

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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. 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.

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