Is Align Technology, Inc. (ALGN) a Good Buy?

The equity market returns were very disappointing in the third quarter, “thanks” to the slowdown of China’s economy and the weaker-than-expected U.S. economic data. It was not entirely clear whether the broader market sell-off made U.S. equity valuations undervalued, but it definitely made them more attractive. It is worth mentioning that Russell 2000 ETF (IWM) underperformed the broad-market S&P 500 ETF by more than 14 percentage points during the period of June 25, 2015 through October 30, 2015. This clearly points to the fact that most investors, including hedge fund firms and institutional investors, heavily cut their exposure to high-potential (but seemingly riskier) small-cap stocks during the bloody third quarter. So let’s take a glance at the smart money sentiment towards Align Technology, Inc. (NASDAQ:ALGN) and see how it was affected.

Align Technology, Inc. was in 26 hedge funds’ portfolios at the end of the third quarter of 2015. ALGN has experienced a decrease in support from the world’s most elite money managers of late. There were 30 hedge funds in our database with ALGN holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Ares Capital Corporation (NASDAQ:ARCC), Servicemaster Global Holdings Inc (NYSE:SERV), and Gentex Corporation (NASDAQ:GNTX) to gather more data points.

Today there are a large number of formulas market participants can use to value publicly traded companies. Two of the most useful formulas are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the top picks of the best fund managers can outclass the market by a solid amount (see the details here).

Now, we’re going to take a gander at the latest action encompassing Align Technology, Inc. (NASDAQ:ALGN).

How have hedgies been trading Align Technology, Inc. (NASDAQ:ALGN)?

Heading into Q4, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Jacob Gottlieb’s Visium Asset Management has the largest position in Align Technology, Inc. (NASDAQ:ALGN), worth close to $77.7 million, amounting to 1.1% of its total 13F portfolio. Sitting at the No. 2 spot is Millennium Management, led by Israel Englander, holding a $50.2 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining peers that hold long positions comprise Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, Conan Laughlin’s North Tide Capital and Ken Griffin’s Citadel Investment Group.

Since Align Technology, Inc. (NASDAQ:ALGN) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there were a few money managers who sold off their full holdings last quarter. Interestingly, James Crichton’s Hitchwood Capital Management sold off the biggest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $75.3 million in stock, and Columbus Circle Investors was right behind this move, as the fund cut about $26 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Align Technology, Inc. (NASDAQ:ALGN) but similarly valued. We will take a look at Ares Capital Corporation (NASDAQ:ARCC), Servicemaster Global Holdings Inc (NYSE:SERV), Gentex Corporation (NASDAQ:GNTX), and Pandora Media Inc (NYSE:P). This group of stocks’ market values resemble ALGN’s market value.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $577 million. That figure was $325 million in ALGN’s case. Pandora Media Inc (NYSE:P) is the most popular stock in this table. On the other hand Ares Capital Corporation (NASDAQ:ARCC) is the least popular one with only 23 bullish hedge fund positions. Align Technology, Inc. (NASDAQ:ALGN) 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. In this regard P might be a better candidate to consider a long position.