Is AlarmCom Hldg Inc (ALRM) A Good Stock To Buy?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

AlarmCom Hldg Inc (NASDAQ:ALRM) shareholders have witnessed an increase in hedge fund sentiment recently. There were 6 hedge funds in our database with ALRM positions at the end of the previous quarter. At the end of this article we will also compare ALRM to other stocks including Bank of N.T. Butterfield & Son Ltd (NYSE:NTB), American Axle & Manufact. Holdings, Inc. (NYSE:AXL), and American Woodmark Corporation (NASDAQ:AMWD) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Keeping this in mind, we’re going to review the fresh action surrounding AlarmCom Hldg Inc (NASDAQ:ALRM).

How have hedgies been trading AlarmCom Hldg Inc (NASDAQ:ALRM)?

At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ALRM over the last 5 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Bares Capital Management, led by Brian Bares, holds the number one position in AlarmCom Hldg Inc (NASDAQ:ALRM). Bares Capital Management has a $40 million position in the stock, comprising 2.4% of its 13F portfolio. The second largest stake is held by Akre Capital Management, led by Charles Akre, holding a $11.5 million position; 0.2% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that are bullish comprise Renaissance Technologies, one of the largest hedge funds in the world, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Cliff Asness’s AQR Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in AlarmCom Hldg Inc (NASDAQ:ALRM). Arrowstreet Capital had $3.1 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also made a $0.9 million investment in the stock during the quarter. The other funds with brand new ALRM positions are Joel Greenblatt’s Gotham Asset Management and Israel Englander’s Millennium Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as AlarmCom Hldg Inc (NASDAQ:ALRM) but similarly valued. We will take a look at Bank of N.T. Butterfield & Son Ltd (NYSE:NTB), American Axle & Manufact. Holdings, Inc. (NYSE:AXL), American Woodmark Corporation (NASDAQ:AMWD), and Community Health Systems (NYSE:CYH). This group of stocks’ market caps resemble ALRM’s market cap.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $186 million. That figure was $62 million in ALRM’s case. Community Health Systems (NYSE:CYH) is the most popular stock in this table. On the other hand American Woodmark Corporation (NASDAQ:AMWD) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks AlarmCom Hldg Inc (NASDAQ:ALRM) is even less popular than AMWD. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.