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Hedge Funds Are Dumping ALLETE Inc (ALE)

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 (Recession is Imminent: We Need A Travel Ban NOW). 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 ALLETE Inc (NYSE:ALE).

ALLETE Inc (NYSE:ALE) investors should pay attention to a decrease in enthusiasm from smart money in recent months. ALE was in 18 hedge funds’ portfolios at the end of March. There were 25 hedge funds in our database with ALE holdings at the end of the previous quarter. Our calculations also showed that ALE 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

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 interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the recent hedge fund action encompassing ALLETE Inc (NYSE:ALE).

What does smart money think about ALLETE Inc (NYSE:ALE)?

Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ALE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of ALLETE Inc (NYSE:ALE), with a stake worth $52.2 million reported as of the end of September. Trailing Renaissance Technologies was Polaris Capital Management, which amassed a stake valued at $40.1 million. AQR Capital Management, Royce & Associates, and GLG Partners 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 Blackstart Capital allocated the biggest weight to ALLETE Inc (NYSE:ALE), around 4.84% of its 13F portfolio. Polaris Capital Management is also relatively very bullish on the stock, setting aside 2.42 percent of its 13F equity portfolio to ALE.

Since ALLETE Inc (NYSE:ALE) has experienced bearish sentiment from hedge fund managers, we can see that there lies a certain “tier” of funds that decided to sell off their entire stakes heading into Q4. Intriguingly, Minhua Zhang’s Weld Capital Management said goodbye to the biggest position of the “upper crust” of funds monitored by Insider Monkey, valued at about $3.2 million in stock, and Mark McMeans’s Brasada Capital Management was right behind this move, as the fund dumped about $2.1 million worth. These moves are important to note, as total hedge fund interest fell by 7 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to ALLETE Inc (NYSE:ALE). We will take a look at Flowserve Corporation (NYSE:FLS), MorphoSys AG (NASDAQ:MOR), Echostar Corporation (NASDAQ:SATS), and Manpowergroup Inc (NYSE:MAN). This group of stocks’ market caps are similar to ALE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLS 29 181471 3
MOR 5 14705 -1
SATS 24 428894 -2
MAN 23 244244 -4
Average 20.25 217329 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $217 million. That figure was $147 million in ALE’s case. Flowserve Corporation (NYSE:FLS) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 5 bullish hedge fund positions. ALLETE Inc (NYSE:ALE) 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 13.4% in 2020 through June 22nd and surpassed the market by 15.9 percentage points. Unfortunately ALE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ALE investors were disappointed as the stock returned -8.7% 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.