Is Alamo Group, Inc. (ALG) A Good Stock To Buy?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Is Alamo Group, Inc. (NYSE:ALG) an attractive investment today? Hedge funds are actually in a bearish mood. The number of long hedge fund bets that are revealed through the 13F filings were cut by 2 lately. ALG was in 10 hedge funds’ portfolios at the end of September. There were 12 hedge funds in our database with ALG holdings at the end of the previous quarter. At the end of this article we will also compare ALG to other stocks including Bob Evans Farms Inc (NASDAQ:BOBE), Virtus Investment Partners Inc (NASDAQ:VRTS), and Saia Inc (NASDAQ:SAIA) to get a better sense of its popularity.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

Subbotina Anna/Shutterstock.com

How are hedge funds trading Alamo Group, Inc. (NYSE:ALG)?

At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, down by 17% from one quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in ALG heading into this year. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Longview Asset Management, led by James A. Star, holds the largest position in Alamo Group, Inc. (NYSE:ALG). Longview Asset Management has a $112 million position in the stock, comprising 1.9% of its 13F portfolio. On Longview Asset Management’s heels is Chuck Royce of Royce & Associates, with a $23.4 million position. Other members of the smart money that are bullish include Martin Whitman’s Third Avenue Management, Cliff Asness’ AQR Capital Management and Peter Muller’s PDT Partners. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We already know that not all hedge funds are bullish on the stock and some hedge funds actually dumped their positions entirely. It’s worth mentioning that Renaissance Technologies, one of the largest hedge funds in the world dumped the biggest position of all the hedgies monitored by Insider Monkey, comprising an estimated $1 million in stock. David Costen Haley’s fund, HBK Investments, also cut its stock, about $0.4 million worth.

Let’s check out hedge fund activity in other stocks similar to Alamo Group, Inc. (NYSE:ALG). These stocks are Bob Evans Farms Inc (NASDAQ:BOBE), Virtus Investment Partners Inc (NASDAQ:VRTS), Saia Inc (NASDAQ:SAIA), and City Holding Company (NASDAQ:CHCO). This group of stocks’ market valuations are similar to ALG’s market valuation.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $148 million in ALG’s case. Bob Evans Farms Inc (NASDAQ:BOBE) is the most popular stock in this table. On the other hand Saia Inc (NASDAQ:SAIA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Alamo Group, Inc. (NYSE:ALG) is even less popular than SAIA. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None