Is Allakos Inc. (NASDAQ:ALLK) a good bet right now? We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Allakos Inc. (NASDAQ:ALLK) has experienced an increase in support from the world’s most elite money managers lately. ALLK was in 16 hedge funds’ portfolios at the end of September. There were 8 hedge funds in our database with ALLK holdings at the end of the previous quarter. Our calculations also showed that ALLK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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. 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.
Felix Baker of Baker Bros.
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 check out the latest hedge fund action surrounding Allakos Inc. (NASDAQ:ALLK).
Hedge fund activity in Allakos Inc. (NASDAQ:ALLK)
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 100% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ALLK over the last 17 quarters. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, Redmile Group held the most valuable stake in Allakos Inc. (NASDAQ:ALLK), which was worth $242 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $34.9 million worth of shares. Baker Bros. Advisors, Rock Springs Capital Management, and Samsara BioCapital 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 Samsara BioCapital allocated the biggest weight to Allakos Inc. (NASDAQ:ALLK), around 15.37% of its 13F portfolio. Redmile Group is also relatively very bullish on the stock, designating 8.1 percent of its 13F equity portfolio to ALLK.
As aggregate interest increased, some big names were leading the bulls’ herd. Baker Bros. Advisors, managed by Julian Baker and Felix Baker, created the most outsized position in Allakos Inc. (NASDAQ:ALLK). Baker Bros. Advisors had $26.7 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $12.8 million position during the quarter. The other funds with new positions in the stock are Jeffrey Jay and David Kroin’s Great Point Partners, Ken Griffin’s Citadel Investment Group, and David E. Shaw’s D E Shaw.
Let’s go over hedge fund activity in other stocks similar to Allakos Inc. (NASDAQ:ALLK). We will take a look at Lancaster Colony Corporation (NASDAQ:LANC), NorthWestern Corporation (NYSE:NWE), Ormat Technologies, Inc. (NYSE:ORA), and Eagle Materials, Inc. (NYSE:EXP). This group of stocks’ market values are closest to ALLK’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LANC | 24 | 224423 | 6 |
| NWE | 15 | 233336 | 0 |
| ORA | 16 | 193542 | 7 |
| EXP | 36 | 819307 | 0 |
| Average | 22.75 | 367652 | 3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $368 million. That figure was $399 million in ALLK’s case. Eagle Materials, Inc. (NYSE:EXP) is the most popular stock in this table. On the other hand NorthWestern Corporation (NYSE:NWE) is the least popular one with only 15 bullish hedge fund positions. Allakos Inc. (NASDAQ:ALLK) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on ALLK as the stock returned 20.8% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
