Were Hedge Funds Right About Alamo Group, Inc. (ALG)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Alamo Group, Inc. (NYSE:ALG).

Alamo Group, Inc. (NYSE:ALG) investors should be aware of a decrease in support from the world’s most elite money managers of late. Our calculations also showed that ALG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the fresh hedge fund action surrounding Alamo Group, Inc. (NYSE:ALG).

What have hedge funds been doing with Alamo Group, Inc. (NYSE:ALG)?

Heading into the first quarter of 2020, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -36% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in ALG a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

The largest stake in Alamo Group, Inc. (NYSE:ALG) was held by Longview Asset Management, which reported holding $171 million worth of stock at the end of September. It was followed by Third Avenue Management with a $5.9 million position. Other investors bullish on the company included Royce & Associates, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Longview Asset Management allocated the biggest weight to Alamo Group, Inc. (NYSE:ALG), around 2.78% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, dishing out 0.58 percent of its 13F equity portfolio to ALG.

Seeing as Alamo Group, Inc. (NYSE:ALG) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few fund managers that decided to sell off their entire stakes by the end of the third quarter. It’s worth mentioning that Ken Griffin’s Citadel Investment Group said goodbye to the largest position of all the hedgies tracked by Insider Monkey, worth about $2.4 million in stock. Brandon Haley’s fund, Holocene Advisors, also dumped its stock, about $0.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to Alamo Group, Inc. (NYSE:ALG). We will take a look at Turquoise Hill Resources Ltd (NYSE:TRQ), Covetrus, Inc. (NASDAQ:CVET), Helios Technologies, Inc. (NASDAQ:HLIO), and CBIZ, Inc. (NYSE:CBZ). This group of stocks’ market values are similar to ALG’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $187 million. That figure was $184 million in ALG’s case. Covetrus, Inc. (NASDAQ:CVET) is the most popular stock in this table. On the other hand Helios Technologies, Inc. (NASDAQ:HLIO) is the least popular one with only 6 bullish hedge fund positions. Alamo Group, Inc. (NYSE:ALG) 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately ALG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ALG investors were disappointed as the stock returned -25.2% 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 most of these stocks already outperformed the market in 2020.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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