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Alleghany Corporation (Y): Are Hedge Funds Right About This Stock?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Alleghany Corporation (NYSE:Y)? The smart money sentiment can provide an answer to this question.

Hedge fund interest in Alleghany Corporation (NYSE:Y) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare Y to other stocks including C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), Raymond James Financial, Inc. (NYSE:RJF), and Arconic Inc. (NYSE:ARNC) to get a better sense of its popularity.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Chuck Royce

Chuck Royce of Royce & Associates

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. We’re going to analyze the latest hedge fund action regarding Alleghany Corporation (NYSE:Y).

How have hedgies been trading Alleghany Corporation (NYSE:Y)?

Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards Y over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

No of Hedge Funds with Y Positions

Among these funds, Polar Capital held the most valuable stake in Alleghany Corporation (NYSE:Y), which was worth $97.9 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $72.5 million worth of shares. Royce & Associates, Renaissance Technologies, and Gillson Capital 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 Gillson Capital allocated the biggest weight to Alleghany Corporation (NYSE:Y), around 1.77% of its portfolio. Cove Street Capital is also relatively very bullish on the stock, earmarking 1.43 percent of its 13F equity portfolio to Y.

Since Alleghany Corporation (NYSE:Y) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of money managers that slashed their entire stakes by the end of the third quarter. Interestingly, Benjamin A. Smith’s Laurion Capital Management cut the biggest investment of all the hedgies monitored by Insider Monkey, worth close to $1.8 million in stock. Alec Litowitz and Ross Laser’s fund, Magnetar Capital, also cut its stock, about $0.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to Alleghany Corporation (NYSE:Y). These stocks are C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), Raymond James Financial, Inc. (NYSE:RJF), Arconic Inc. (NYSE:ARNC), and Yandex NV (NASDAQ:YNDX). This group of stocks’ market values resemble Y’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHRW 23 300442 3
RJF 27 793083 -8
ARNC 34 3136590 -8
YNDX 35 809543 5
Average 29.75 1259915 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1260 million. That figure was $405 million in Y’s case. Yandex NV (NASDAQ:YNDX) is the most popular stock in this table. On the other hand C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is the least popular one with only 23 bullish hedge fund positions. Alleghany Corporation (NYSE:Y) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately Y wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); Y investors were disappointed as the stock returned -2.2% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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