Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Allegro Merger Corp. (NASDAQ:ALGR) changed recently.
Hedge fund interest in Allegro Merger Corp. (NASDAQ:ALGR) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ALGR to other stocks including Evolution Petroleum Corporation (NYSE:EPM), Griffin Industrial Realty, Inc. (NASDAQ:GRIF), and Standard Diversified Inc. (NYSEAMERICAN:SDI) to get a better sense of its popularity.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Sander Gerber of Hudson Bay Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to go over the fresh hedge fund action regarding Allegro Merger Corp. (NASDAQ:ALGR).
What does smart money think about Allegro Merger Corp. (NASDAQ:ALGR)?
Heading into the fourth quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in ALGR a year ago. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Among these funds, Hudson Bay Capital Management held the most valuable stake in Allegro Merger Corp. (NASDAQ:ALGR), which was worth $9.5 million at the end of the third quarter. On the second spot was Millennium Management which amassed $5.1 million worth of shares. Glazer Capital, Marshall Wace, and Vertex One Asset 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 Glazer Capital allocated the biggest weight to Allegro Merger Corp. (NASDAQ:ALGR), around 0.46% of its 13F portfolio. Vertex One Asset Management is also relatively very bullish on the stock, setting aside 0.37 percent of its 13F equity portfolio to ALGR.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s also examine hedge fund activity in other stocks similar to Allegro Merger Corp. (NASDAQ:ALGR). We will take a look at Evolution Petroleum Corporation (NYSE:EPM), Griffin Industrial Realty, Inc. (NASDAQ:GRIF), Standard Diversified Inc. (NYSEAMERICAN:SDI), and DNB Financial Corporation (NASDAQ:DNBF). All of these stocks’ market caps are closest to ALGR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EPM | 12 | 20409 | -2 |
| GRIF | 2 | 27297 | 0 |
| SDI | 4 | 4190 | 0 |
| DNBF | 5 | 11226 | 1 |
| Average | 5.75 | 15781 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $23 million in ALGR’s case. Evolution Petroleum Corporation (NYSE:EPM) is the most popular stock in this table. On the other hand Griffin Industrial Realty, Inc. (NASDAQ:GRIF) is the least popular one with only 2 bullish hedge fund positions. Allegro Merger Corp. (NASDAQ:ALGR) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ALGR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ALGR were disappointed as the stock returned 0.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.