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Were Hedge Funds Right About Dumping ALLETE Inc (ALE)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtALLETE Inc (NYSE:ALE) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

ALLETE Inc (NYSE:ALE) shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. ALE was in 18 hedge funds’ portfolios at the end of March. There were 25 hedge funds in our database with ALE holdings at the end of the previous quarter. Our calculations also showed that ALE isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to view the key hedge fund action surrounding ALLETE Inc (NYSE:ALE).

What does smart money think about ALLETE Inc (NYSE:ALE)?

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ALE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in ALLETE Inc (NYSE:ALE), which was worth $52.2 million at the end of the third quarter. On the second spot was Polaris Capital Management which amassed $40.1 million worth of shares. AQR Capital Management, Royce & Associates, and GLG Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Blackstart Capital allocated the biggest weight to ALLETE Inc (NYSE:ALE), around 4.84% of its 13F portfolio. Polaris Capital Management is also relatively very bullish on the stock, setting aside 2.42 percent of its 13F equity portfolio to ALE.

Judging by the fact that ALLETE Inc (NYSE:ALE) has experienced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few fund managers who were dropping their positions entirely in the first quarter. Intriguingly, Minhua Zhang’s Weld Capital Management said goodbye to the biggest investment of the 750 funds monitored by Insider Monkey, worth about $3.2 million in stock. Mark McMeans’s fund, Brasada Capital Management, also sold off its stock, about $2.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 7 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to ALLETE Inc (NYSE:ALE). These stocks are Flowserve Corporation (NYSE:FLS), MorphoSys AG (NASDAQ:MOR), Echostar Corporation (NASDAQ:SATS), and Manpowergroup Inc (NYSE:MAN). This group of stocks’ market valuations are closest to ALE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLS 29 181471 3
MOR 5 14705 -1
SATS 24 428894 -2
MAN 23 244244 -4
Average 20.25 217329 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $217 million. That figure was $147 million in ALE’s case. Flowserve Corporation (NYSE:FLS) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 5 bullish hedge fund positions. ALLETE Inc (NYSE:ALE) 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately ALE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ALE investors were disappointed as the stock returned -4% since Q1 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.

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