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Hedge Funds Were Selling Alleghany Corporation (Y) Before The Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published 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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let’s see whether Alleghany Corporation (NYSE:Y) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Is Alleghany Corporation (NYSE:Y) a bargain? Prominent investors are getting less bullish. The number of bullish hedge fund positions fell by 4 in recent months. Our calculations also showed that Y isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Y was in 24 hedge funds’ portfolios at the end of December. There were 28 hedge funds in our database with Y holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Today there are numerous tools shareholders have at their disposal to size up stocks. Some of the most useful tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best hedge fund managers can outclass the S&P 500 by a significant amount (see the details here).

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when 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 look at the latest hedge fund action regarding Alleghany Corporation (NYSE:Y).

How are hedge funds trading Alleghany Corporation (NYSE:Y)?

Heading into the first quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in Y a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is Y A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, holds the largest position in Alleghany Corporation (NYSE:Y). Polar Capital has a $96.3 million position in the stock, comprising 0.8% of its 13F portfolio. On Polar Capital’s heels is Cliff Asness of AQR Capital Management, with a $81.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions contain Chuck Royce’s Royce & Associates, Daniel Johnson’s Gillson Capital and Daniel Lascano’s Lomas Capital Management. In terms of the portfolio weights assigned to each position Capital Returns Management allocated the biggest weight to Alleghany Corporation (NYSE:Y), around 4.51% of its 13F portfolio. Lomas Capital Management is also relatively very bullish on the stock, dishing out 2.58 percent of its 13F equity portfolio to Y.

Judging by the fact that Alleghany Corporation (NYSE:Y) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of funds that slashed their full holdings last quarter. It’s worth mentioning that Robert Joseph Caruso’s Select Equity Group cut the biggest investment of the 750 funds tracked by Insider Monkey, valued at an estimated $9.6 million in stock, and Matthew Tewksbury’s Stevens Capital Management was right behind this move, as the fund cut about $2.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Alleghany Corporation (NYSE:Y). We will take a look at Teradyne, Inc. (NYSE:TER), Globe Life Inc. (NYSE:GL), Everest Re Group Ltd (NYSE:RE), and PagSeguro Digital Ltd. (NYSE:PAGS). This group of stocks’ market valuations are closest to Y’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TER 33 1144237 -1
GL 23 861493 2
RE 24 876907 1
PAGS 21 802176 -15
Average 25.25 921203 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $921 million. That figure was $384 million in Y’s case. Teradyne, Inc. (NYSE:TER) is the most popular stock in this table. On the other hand PagSeguro Digital Ltd. (NYSE:PAGS) is the least popular one with only 21 bullish hedge fund positions. Alleghany Corporation (NYSE:Y) 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately Y wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); Y investors were disappointed as the stock returned -35.5% 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.

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