Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on Align Technology, Inc. (NASDAQ:ALGN).
Align Technology, Inc. (NASDAQ:ALGN) was in 40 hedge funds’ portfolios at the end of December. ALGN investors should pay attention to an increase in activity from the world’s largest hedge funds lately. There were 39 hedge funds in our database with ALGN positions at the end of the previous quarter. Our calculations also showed that ALGN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 S&P 500 ETFs by more than 41 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.
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind let’s take a peek at the recent hedge fund action surrounding Align Technology, Inc. (NASDAQ:ALGN).
How are hedge funds trading Align Technology, Inc. (NASDAQ:ALGN)?
At Q4’s end, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ALGN over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Align Technology, Inc. (NASDAQ:ALGN), which was worth $728.5 million at the end of the third quarter. On the second spot was Hillhouse Capital Management which amassed $656.7 million worth of shares. Bares Capital Management, Millennium Management, and Fisher Asset Management 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 Bares Capital Management allocated the biggest weight to Align Technology, Inc. (NASDAQ:ALGN), around 9.32% of its 13F portfolio. Hillhouse Capital Management is also relatively very bullish on the stock, designating 8.18 percent of its 13F equity portfolio to ALGN.
As one would reasonably expect, some big names were leading the bulls’ herd. Hitchwood Capital Management, managed by James Crichton, created the biggest position in Align Technology, Inc. (NASDAQ:ALGN). Hitchwood Capital Management had $43.3 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $14.5 million investment in the stock during the quarter. The other funds with brand new ALGN positions are Robert Pitts’s Steadfast Capital Management, Krishen Sud’s Sivik Global Healthcare, and Donald Sussman’s Paloma Partners.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Align Technology, Inc. (NASDAQ:ALGN) but similarly valued. These stocks are CoStar Group Inc (NASDAQ:CSGP), Hartford Financial Services Group Inc (NYSE:HIG), MSCI Inc (NYSE:MSCI), and Fifth Third Bancorp (NASDAQ:FITB). All of these stocks’ market caps are closest to ALGN’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1011 million. That figure was $2553 million in ALGN’s case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand Hartford Financial Services Group Inc (NYSE:HIG) is the least popular one with only 34 bullish hedge fund positions. Align Technology, Inc. (NASDAQ:ALGN) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but beat the market by 1.9 percentage points. Unfortunately ALGN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ALGN investors were disappointed as the stock returned -22.3% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.