Did Hedge Funds Make The Right Call On Allison Transmission Holdings Inc (ALSN) ?

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 Allison Transmission Holdings Inc (NYSE:ALSN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Allison Transmission Holdings Inc (NYSE:ALSN) has seen a decrease in support from the world’s most elite money managers lately. ALSN was in 27 hedge funds’ portfolios at the end of the first quarter of 2020. There were 33 hedge funds in our database with ALSN holdings at the end of the previous quarter. Our calculations also showed that ALSN 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.

In today’s marketplace there are many signals investors can use to assess stocks. A pair of the less utilized signals are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the top picks of the top money managers can outperform their index-focused peers by a solid margin (see the details here).

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the key hedge fund action surrounding Allison Transmission Holdings Inc (NYSE:ALSN).

How are hedge funds trading Allison Transmission Holdings Inc (NYSE:ALSN)?

At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in ALSN 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.

The largest stake in Allison Transmission Holdings Inc (NYSE:ALSN) was held by Renaissance Technologies, which reported holding $175.9 million worth of stock at the end of September. It was followed by D E Shaw with a $89.8 million position. Other investors bullish on the company included GLG Partners, AQR Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Chiron Investment Management allocated the biggest weight to Allison Transmission Holdings Inc (NYSE:ALSN), around 1.61% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, setting aside 0.75 percent of its 13F equity portfolio to ALSN.

Due to the fact that Allison Transmission Holdings Inc (NYSE:ALSN) has witnessed bearish sentiment from the smart money, it’s easy to see that there was a specific group of hedge funds that slashed their entire stakes last quarter. Intriguingly, Anand Parekh’s Alyeska Investment Group said goodbye to the biggest stake of the 750 funds followed by Insider Monkey, worth close to $54 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $12.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 6 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Allison Transmission Holdings Inc (NYSE:ALSN) but similarly valued. We will take a look at Cirrus Logic, Inc. (NASDAQ:CRUS), Tandem Diabetes Care Inc (NASDAQ:TNDM), Cree, Inc. (NASDAQ:CREE), and First Financial Bankshares Inc (NASDAQ:FFIN). This group of stocks’ market valuations resemble ALSN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CRUS 28 286330 3
TNDM 28 245964 -11
CREE 16 309952 -9
FFIN 14 28294 1
Average 21.5 217635 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $405 million in ALSN’s case. Cirrus Logic, Inc. (NASDAQ:CRUS) is the most popular stock in this table. On the other hand First Financial Bankshares Inc (NASDAQ:FFIN) is the least popular one with only 14 bullish hedge fund positions. Allison Transmission Holdings Inc (NYSE:ALSN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 but beat the market by 15.5 percentage points. Unfortunately ALSN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ALSN were disappointed as the stock returned 13.4% during the same time period 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 many of these stocks already outperformed the market so far this year.

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