Were Hedge Funds Right About Piling Into Align Technology (ALGN)?

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of September. At Insider Monkey, we follow nearly 900 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Align Technology, Inc. (NASDAQ:ALGN), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is Align Technology, Inc. (NASDAQ:ALGN) a healthy stock for your portfolio? Hedge funds were getting more bullish. The number of long hedge fund bets improved by 3 in recent months. Align Technology, Inc. (NASDAQ:ALGN) was in 50 hedge funds’ portfolios at the end of December. The all time high for this statistic was previously 47. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ALGN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 47 hedge funds in our database with ALGN positions at the end of the third quarter.

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 124 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.

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let’s take a glance at the recent hedge fund action regarding Align Technology, Inc. (NASDAQ:ALGN).

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

At Q4’s end, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ALGN over the last 22 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Bares Capital Management held the most valuable stake in Align Technology, Inc. (NASDAQ:ALGN), which was worth $429.9 million at the end of the fourth quarter. On the second spot was Renaissance Technologies which amassed $317.7 million worth of shares. Viking Global, Fisher Asset Management, and Melvin Capital Management 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 Bares Capital Management allocated the biggest weight to Align Technology, Inc. (NASDAQ:ALGN), around 7.95% of its 13F portfolio. Palo Alto Investors is also relatively very bullish on the stock, dishing out 1.89 percent of its 13F equity portfolio to ALGN.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in Align Technology, Inc. (NASDAQ:ALGN). Balyasny Asset Management had $21.1 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $2.5 million investment in the stock during the quarter. The following funds were also among the new ALGN investors: Richard Schimel and Lawrence Sapanski’s Cinctive Capital Management, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Jinghua Yan’s TwinBeech Capital.

Let’s check out hedge fund activity in other stocks similar to Align Technology, Inc. (NASDAQ:ALGN). These stocks are Electronic Arts Inc. (NASDAQ:EA), National Grid plc (NYSE:NGG), Unity Software Inc. (NYSE:U), DocuSign, Inc. (NASDAQ:DOCU), Moderna, Inc. (NASDAQ:MRNA), American Electric Power Company, Inc. (NASDAQ:AEP), and Veeva Systems Inc (NYSE:VEEV). All of these stocks’ market caps resemble ALGN’s market cap.

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As you can see these stocks had an average of 37.6 hedge funds with bullish positions and the average amount invested in these stocks was $2891 million. That figure was $2481 million in ALGN’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 5 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 74.3. 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 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately ALGN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ALGN were disappointed as the stock returned 11.4% since the end of December (through 4/30) 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 many of these stocks already outperformed the market since 2019.

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