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Did Hedge Funds Make The Right Call On Alarm.com Holdings Inc (ALRM) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Alarm.com Holdings Inc (NASDAQ:ALRM) and determine whether the smart money was really smart about this stock.

Alarm.com Holdings Inc (NASDAQ:ALRM) was in 23 hedge funds’ portfolios at the end of the first quarter of 2020. ALRM shareholders have witnessed a decrease in support from the world’s most elite money managers recently. There were 28 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 (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 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. 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.

Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now we’re going to view the new hedge fund action encompassing Alarm.com Holdings Inc (NASDAQ:ALRM).

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

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in ALRM a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Charles Akre’s Akre Capital Management has the largest position in Alarm.com Holdings Inc (NASDAQ:ALRM), worth close to $68.9 million, accounting for 0.7% of its total 13F portfolio. The second largest stake is held by Bares Capital Management, managed by Brian Bares, which holds a $39.4 million position; 1.4% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism comprise Ken Fisher’s Fisher Asset Management, Bryan Hinmon’s Motley Fool Asset Management and Mark Coe’s Intrinsic Edge Capital. In terms of the portfolio weights assigned to each position Red Cedar Management allocated the biggest weight to Alarm.com Holdings Inc (NASDAQ:ALRM), around 3.87% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 1.42 percent of its 13F equity portfolio to ALRM.

Due to the fact that Alarm.com Holdings Inc (NASDAQ:ALRM) has faced bearish sentiment from hedge fund managers, it’s safe to say that there were a few money managers who sold off their full holdings in the first quarter. It’s worth mentioning that William C. Martin’s Raging Capital Management dumped the largest investment of the “upper crust” of funds followed by Insider Monkey, comprising close to $33.3 million in stock. Bruce Emery’s fund, Greenvale Capital, also dropped its stock, about $32.2 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 5 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Alarm.com Holdings Inc (NASDAQ:ALRM). These stocks are Alector, Inc. (NASDAQ:ALEC), EPR Properties (NYSE:EPR), Wyndham Destinations, Inc. (NYSE:WYND), and Fulton Financial Corp (NASDAQ:FULT). This group of stocks’ market values resemble ALRM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALEC 15 416696 2
EPR 23 149422 -1
WYND 25 200324 -3
FULT 14 12965 0
Average 19.25 194852 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $195 million. That figure was $153 million in ALRM’s case. Wyndham Destinations, Inc. (NYSE:WYND) is the most popular stock in this table. On the other hand Fulton Financial Corp (NASDAQ:FULT) is the least popular one with only 14 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on ALRM as the stock returned 66.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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