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Did Hedge Funds Make The Right Call On Allegiant Travel Company (ALGT)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Allegiant Travel Company (NASDAQ:ALGT) and determine whether hedge funds had an edge regarding this stock.

Allegiant Travel Company (NASDAQ:ALGT) shareholders have witnessed a decrease in enthusiasm from smart money of late. ALGT was in 19 hedge funds’ portfolios at the end of March. There were 24 hedge funds in our database with ALGT positions at the end of the previous quarter. Our calculations also showed that ALGT 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a look at the new hedge fund action surrounding Allegiant Travel Company (NASDAQ:ALGT).

What have hedge funds been doing with Allegiant Travel Company (NASDAQ:ALGT)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ALGT over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

More specifically, PAR Capital Management was the largest shareholder of Allegiant Travel Company (NASDAQ:ALGT), with a stake worth $130 million reported as of the end of September. Trailing PAR Capital Management was Diamond Hill Capital, which amassed a stake valued at $41.8 million. Ancient Art (Teton Capital), Marshall Wace LLP, and First Pacific Advisors LLC 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 Mountain Lake Investment Management allocated the biggest weight to Allegiant Travel Company (NASDAQ:ALGT), around 7.23% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, dishing out 5.52 percent of its 13F equity portfolio to ALGT.

Since Allegiant Travel Company (NASDAQ:ALGT) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of funds that elected to cut their full holdings in the first quarter. Intriguingly, Chuck Royce’s Royce & Associates dropped the biggest investment of the 750 funds monitored by Insider Monkey, totaling an estimated $26.6 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its stock, about $10.9 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 5 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Allegiant Travel Company (NASDAQ:ALGT) but similarly valued. These stocks are PROS Holdings, Inc. (NYSE:PRO), Visteon Corp (NASDAQ:VC), Korn Ferry (NYSE:KFY), and ProAssurance Corporation (NYSE:PRA). This group of stocks’ market valuations are closest to ALGT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRO 16 151037 -4
VC 19 152241 -10
KFY 20 136009 1
PRA 10 124328 -8
Average 16.25 140904 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $252 million in ALGT’s case. Korn Ferry (NYSE:KFY) is the most popular stock in this table. On the other hand ProAssurance Corporation (NYSE:PRA) is the least popular one with only 10 bullish hedge fund positions. Allegiant Travel Company (NASDAQ:ALGT) 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on ALGT as the stock returned 38.7% since Q1 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.