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Did Hedge Funds Make The Right Call On Alcon Inc. (ALC) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Alcon Inc. (NYSE:ALC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Alcon Inc. (NYSE:ALC) was in 25 hedge funds’ portfolios at the end of March. ALC shareholders have witnessed an increase in hedge fund sentiment of late. There were 24 hedge funds in our database with ALC positions at the end of the previous quarter. Our calculations also showed that ALC 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.

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 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.

Anna Nikolayevsky Axel Capital

Anna Nikolayevsky of Axel Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. Keeping this in mind we’re going to analyze the new hedge fund action encompassing Alcon Inc. (NYSE:ALC).

What does smart money think about Alcon Inc. (NYSE:ALC)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ALC over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Is ALC A Good Stock To Buy?

The largest stake in Alcon Inc. (NYSE:ALC) was held by Ako Capital, which reported holding $144.3 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $131.6 million position. Other investors bullish on the company included Sirios Capital Management, D E Shaw, and Bridger Management. In terms of the portfolio weights assigned to each position Sirios Capital Management allocated the biggest weight to Alcon Inc. (NYSE:ALC), around 5.48% of its 13F portfolio. Axel Capital Management is also relatively very bullish on the stock, dishing out 5.37 percent of its 13F equity portfolio to ALC.

As one would reasonably expect, key hedge funds have been driving this bullishness. Renaissance Technologies, established the most valuable position in Alcon Inc. (NYSE:ALC). Renaissance Technologies had $22.8 million invested in the company at the end of the quarter. Anna Nikolayevsky’s Axel Capital Management also initiated a $4.1 million position during the quarter. The following funds were also among the new ALC investors: Mark Coe’s Intrinsic Edge Capital, Mitch Rubin’s RiverPark Advisors, and Greg Eisner’s Engineers Gate Manager.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Alcon Inc. (NYSE:ALC) but similarly valued. These stocks are AFLAC Incorporated (NYSE:AFL), DexCom, Inc. (NASDAQ:DXCM), China Telecom Corporation Limited (NYSE:CHA), and Lululemon Athletica inc. (NASDAQ:LULU). This group of stocks’ market valuations match ALC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AFL 32 387153 0
DXCM 58 1211152 18
CHA 5 28440 -2
LULU 40 788852 -7
Average 33.75 603899 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $604 million. That figure was $605 million in ALC’s case. DexCom, Inc. (NASDAQ:DXCM) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. Alcon Inc. (NYSE:ALC) 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 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 and surpassed the market by 15.5 percentage points. Unfortunately ALC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ALC investors were disappointed as the stock returned 12.8% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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