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Hedge Funds Are Piling Into Alector, Inc. (ALEC)

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). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 Alector, Inc. (NASDAQ:ALEC) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Alector, Inc. (NASDAQ:ALEC) shareholders have witnessed an increase in enthusiasm from smart money lately. Alector, Inc. (NASDAQ:ALEC) was in 29 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 15. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ALEC 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.

Peter Kolchinsky of RA Capital 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 we’re going to take a gander at the key hedge fund action surrounding Alector, Inc. (NASDAQ:ALEC).

Hedge fund activity in Alector, Inc. (NASDAQ:ALEC)

At Q2’s end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 93% from the first quarter of 2020. On the other hand, there were a total of 13 hedge funds with a bullish position in ALEC a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

The largest stake in Alector, Inc. (NASDAQ:ALEC) was held by OrbiMed Advisors, which reported holding $146 million worth of stock at the end of September. It was followed by RA Capital Management with a $100.9 million position. Other investors bullish on the company included Deerfield Management, Casdin Capital, and Perceptive Advisors. In terms of the portfolio weights assigned to each position OrbiMed Advisors allocated the biggest weight to Alector, Inc. (NASDAQ:ALEC), around 2.06% of its 13F portfolio. RA Capital Management is also relatively very bullish on the stock, earmarking 1.97 percent of its 13F equity portfolio to ALEC.

As one would reasonably expect, specific money managers have jumped into Alector, Inc. (NASDAQ:ALEC) headfirst. Point72 Asset Management, managed by Steve Cohen, created the most outsized position in Alector, Inc. (NASDAQ:ALEC). Point72 Asset Management had $7 million invested in the company at the end of the quarter. Noam Gottesman’s GLG Partners also made a $5.2 million investment in the stock during the quarter. The following funds were also among the new ALEC investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Renaissance Technologies, and Panayotis Takis Sparaggis’s Alkeon Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Alector, Inc. (NASDAQ:ALEC) but similarly valued. We will take a look at Corcept Therapeutics Incorporated (NASDAQ:CORT), ServisFirst Bancshares, Inc. (NASDAQ:SFBS), LexinFintech Holdings Ltd. (NASDAQ:LX), PROS Holdings, Inc. (NYSE:PRO), AeroVironment, Inc. (NASDAQ:AVAV), Tri Pointe Group Inc (NYSE:TPH), and Forma Therapeutics Holdings, Inc. (NASDAQ:FMTX). This group of stocks’ market caps match ALEC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CORT 23 219577 2
SFBS 9 15227 -1
LX 14 75859 -3
PRO 19 231944 3
AVAV 17 70334 7
TPH 31 239239 4
FMTX 11 906914 11
Average 17.7 251299 3.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.7 hedge funds with bullish positions and the average amount invested in these stocks was $251 million. That figure was $383 million in ALEC’s case. Tri Pointe Group Inc (NYSE:TPH) is the most popular stock in this table. On the other hand ServisFirst Bancshares, Inc. (NASDAQ:SFBS) is the least popular one with only 9 bullish hedge fund positions. Alector, Inc. (NASDAQ:ALEC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ALEC is 85.5. 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 ALEC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ALEC were disappointed as the stock returned -43.9% 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.