Were Hedge Funds Right About Allegion plc (ALLE)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Allegion plc (NYSE:ALLE) and determine whether the smart money was really smart about this stock.

Is Allegion plc (NYSE:ALLE) a splendid investment now? Prominent investors were in a bullish mood. The number of long hedge fund positions went up by 6 in recent months. Our calculations also showed that ALLE isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). ALLE was in 31 hedge funds’ portfolios at the end of March. There were 25 hedge funds in our database with ALLE positions at the end of the previous quarter.

Video: 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 S&P 500 ETFs by more than 58 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. 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.

John Overdeck of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to analyze the key hedge fund action regarding Allegion plc (NYSE:ALLE).

How have hedgies been trading Allegion plc (NYSE:ALLE)?

At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ALLE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Ako Capital was the largest shareholder of Allegion plc (NYSE:ALLE), with a stake worth $170.6 million reported as of the end of September. Trailing Ako Capital was Intermede Investment Partners, which amassed a stake valued at $74.6 million. Bristol Gate Capital Partners, Renaissance Technologies, and Carlson Capital 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 Albar Capital allocated the biggest weight to Allegion plc (NYSE:ALLE), around 5.53% of its 13F portfolio. Bristol Gate Capital Partners is also relatively very bullish on the stock, setting aside 4.88 percent of its 13F equity portfolio to ALLE.

Now, key hedge funds were breaking ground themselves. Albar Capital, managed by Javier Velazquez, established the largest position in Allegion plc (NYSE:ALLE). Albar Capital had $5.8 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $2.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Jinghua Yan’s TwinBeech Capital, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Allegion plc (NYSE:ALLE) but similarly valued. We will take a look at Pinnacle West Capital Corporation (NYSE:PNW), Cheniere Energy, Inc. (NYSE:LNG), Molina Healthcare, Inc. (NYSE:MOH), and Avery Dennison Corporation (NYSE:AVY). This group of stocks’ market valuations are closest to ALLE’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $1028 million. That figure was $404 million in ALLE’s case. Cheniere Energy, Inc. (NYSE:LNG) is the most popular stock in this table. On the other hand Avery Dennison Corporation (NYSE:AVY) is the least popular one with only 18 bullish hedge fund positions. Allegion plc (NYSE:ALLE) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ALLE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ALLE were disappointed as the stock returned 11.4% during the same time period 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 so far this year.

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