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Hedge Funds Are Buying Allison Transmission Holdings Inc (ALSN)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 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 June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Allison Transmission Holdings Inc (NYSE:ALSN) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Allison Transmission Holdings Inc (NYSE:ALSN) investors should be aware of an increase in support from the world’s most elite money managers lately. Allison Transmission Holdings Inc (NYSE:ALSN) was in 32 hedge funds’ portfolios at the end of June. The all time high for this statistics is 40. There were 27 hedge funds in our database with ALSN positions at the end of the first quarter. Our calculations also showed that ALSN isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let’s take a look at the recent hedge fund action regarding Allison Transmission Holdings Inc (NYSE:ALSN).

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

At the end of the second quarter, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from one quarter earlier. On the other hand, there were a total of 25 hedge funds with a bullish position in ALSN a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

The largest stake in Allison Transmission Holdings Inc (NYSE:ALSN) was held by Renaissance Technologies, which reported holding $226.9 million worth of stock at the end of September. It was followed by D E Shaw with a $92 million position. Other investors bullish on the company included GLG Partners, Millennium Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Allison Transmission Holdings Inc (NYSE:ALSN), around 0.7% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, setting aside 0.6 percent of its 13F equity portfolio to ALSN.

Now, key money managers have been driving this bullishness. Echo Street Capital Management, managed by Greg Poole, assembled the most outsized position in Allison Transmission Holdings Inc (NYSE:ALSN). Echo Street Capital Management had $2.9 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $2.6 million position during the quarter. The following funds were also among the new ALSN investors: Benjamin A. Smith’s Laurion Capital Management, Joel Greenblatt’s Gotham Asset Management, and Ray Dalio’s Bridgewater Associates.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Allison Transmission Holdings Inc (NYSE:ALSN) but similarly valued. These stocks are L Brands Inc (NYSE:LB), AGCO Corporation (NYSE:AGCO), Penn National Gaming, Inc (NASDAQ:PENN), Emergent Biosolutions Inc (NYSE:EBS), Littelfuse, Inc. (NASDAQ:LFUS), MorphoSys AG (NASDAQ:MOR), and LogMeIn Inc (NASDAQ:LOGM). This group of stocks’ market caps match ALSN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LB 42 1472803 3
AGCO 21 144524 2
PENN 34 429102 16
EBS 21 119854 4
LFUS 24 316882 2
MOR 6 12533 1
LOGM 31 785090 3
Average 25.6 468684 4.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $469 million. That figure was $543 million in ALSN’s case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 6 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. Our overall hedge fund sentiment score for ALSN is 70.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23.8% in 2020 through September 14th and beat the market by 17.6 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 -3.7% 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.