Was The Smart Money Right About Align Technology, Inc. (ALGN)?

Stocks, especially the once high flying technology stocks, had a lousy start to the new year. QQQ lost 9% of its value in January. We aren’t certain about the bubbly technology stocks that trade for ridiculously high multiples of their revenues, but we believe top hedge fund stocks will deliver positive returns for the rest of the year. In this article, we will take a closer look at hedge fund sentiment towards Align Technology, Inc. (NASDAQ:ALGN) at the end of the third quarter and determine whether the smart money was really smart about this stock.

Is Align Technology, Inc. (NASDAQ:ALGN) a healthy stock for your portfolio? Prominent investors were in a pessimistic mood. The number of bullish hedge fund positions decreased by 8 recently. Align Technology, Inc. (NASDAQ:ALGN) was in 49 hedge funds’ portfolios at the end of September. The all time high for this statistic is 57. Our calculations also showed that ALGN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s analyze the fresh hedge fund action encompassing Align Technology, Inc. (NASDAQ:ALGN).

Do Hedge Funds Think ALGN Is A Good Stock To Buy Now?

At Q3’s end, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the second quarter of 2021. On the other hand, there were a total of 47 hedge funds with a bullish position in ALGN a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Align Technology, Inc. (NASDAQ:ALGN) was held by Bares Capital Management, which reported holding $368.2 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $288.4 million position. Other investors bullish on the company included Arrowstreet Capital, Melvin Capital Management, and Hitchwood Capital Management. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Align Technology, Inc. (NASDAQ:ALGN), around 6.61% of its 13F portfolio. Hitchwood Capital Management is also relatively very bullish on the stock, designating 3.84 percent of its 13F equity portfolio to ALGN.

Judging by the fact that Align Technology, Inc. (NASDAQ:ALGN) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of money managers that slashed their entire stakes last quarter. At the top of the heap, Gabriel Plotkin’s Melvin Capital Management cut the largest position of all the hedgies monitored by Insider Monkey, totaling an estimated $213.9 million in stock. Renaissance Technologies, also cut its stock, about $38.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 8 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Align Technology, Inc. (NASDAQ:ALGN). These stocks are Lululemon Athletica inc. (NASDAQ:LULU), Public Storage (NYSE:PSA), NXP Semiconductors NV (NASDAQ:NXPI), Ferrari N.V. (NYSE:RACE), Itau Unibanco Holding SA (NYSE:ITUB), Takeda Pharmaceutical Company Limited (NYSE:TAK), and Prudential Public Limited Company (NYSE:PUK). All of these stocks’ market caps match ALGN’s market cap.

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As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $723 million. That figure was $2263 million in ALGN’s case. NXP Semiconductors NV (NASDAQ:NXPI) is the most popular stock in this table. On the other hand Prudential Public Limited Company (NYSE:PUK) is the least popular one with only 4 bullish hedge fund positions. Align Technology, Inc. (NASDAQ:ALGN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ALGN is 70.7. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, ALGN wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ALGN were disappointed as the stock returned -25.6% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.