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Hedge Funds Dumping ALLETE Inc (ALE); Should You Follow?

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth depends on it. Regardless of the various methods used by elite investors like David Tepper and Dan Loeb, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.

Is ALLETE Inc (NYSE:ALE) ready to rally soon? Hedge funds are reducing their bets on the stock. The number of bullish hedge fund bets stayed the same which is a slightly negative development in our experience. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Ternium S.A. (ADR) (NYSE:TX), Take-Two Interactive Software, Inc. (NASDAQ:TTWO), and Cable One Inc (NYSE:CABO) to gather more data points.

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According to most investors, hedge funds are assumed to be worthless, outdated financial tools of years past. While there are over 8000 funds with their doors open today, we choose to focus on the bigwigs of this club, about 700 funds. These money managers preside over bulk of all hedge funds’ total capital, and by keeping an eye on their finest picks, Insider Monkey has unearthed numerous investment strategies that have historically surpassed the market. Insider Monkey’s small-cap hedge fund strategy outpaced the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Keeping this in mind, let’s take a look at the key action regarding ALLETE Inc (NYSE:ALE).

How are hedge funds trading ALLETE Inc (NYSE:ALE)?

Heading into Q4, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, David Dreman’s Dreman Value Management has the largest position in ALLETE Inc (NYSE:ALE), worth close to $10.7 million, amounting to 1.1% of its total 13F portfolio. Sitting on the second spot is Polaris Capital Management, led by Bernard Horn, holding a $9.8 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism contain Chuck Royce’s Royce & Associates, Stuart J. Zimmer’s Zimmer Partners and Ken Gray and Steve Walsh’s Bryn Mawr Capital.

Due to the fact that ALLETE Inc (NYSE:ALE) has faced bearish sentiment from the smart money, we can see that there lies a certain “tier” of fund managers that slashed their positions entirely last quarter. At the top of the heap, Jim Simons’s Renaissance Technologies dropped the biggest stake of all the hedgies monitored by Insider Monkey, valued at about $5.6 million in stock, while Peter Muller of PDT Partners unloaded some $600,000 worth of shares. These transactions are important to note, as total 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 ALLETE Inc (NYSE:ALE). These stocks are Ternium S.A. (ADR) (NYSE:TX), Take-Two Interactive Software, Inc. (NASDAQ:TTWO), Cable One Inc (NYSE:CABO), and Fortress Investment Group LLC (NYSE:FIG). All of these stocks’ market caps are closest to ALE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TX 13 27548 2
TTWO 35 905047 -5
CABO 25 274746 22
FIG 21 144098 3

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $338 million. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is the most popular stock in this table. On the other hand Ternium S.A. (ADR) (NYSE:TX) is the least popular one with only 13 funds owning shares. ALLETTE is even less popular than Ternium and the funds from our database amassed $42 million worth of shares, significantly below average. With this in mind, it may be not the best idea to buy shares, seeing that hedge funds are not very keen on it. However, in order to get a clearer picture, a further analysis is still required.

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