We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. That’s a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
FARO Technologies, Inc. (NASDAQ:FARO) was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. FARO has seen an increase in support from the world’s most elite money managers in recent months. There were 7 hedge funds in our database with FARO positions at the end of the previous quarter. Our calculations also showed that FARO 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jack Ripsteen of Potrero Capital Research
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. Let’s take a glance at the key hedge fund action regarding FARO Technologies, Inc. (NASDAQ:FARO).
What does smart money think about FARO Technologies, Inc. (NASDAQ:FARO)?
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the second quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in FARO a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in FARO Technologies, Inc. (NASDAQ:FARO) was held by Royce & Associates, which reported holding $32.5 million worth of stock at the end of September. It was followed by Prospector Partners with a $4.2 million position. Other investors bullish on the company included Driehaus Capital, Fisher Asset Management, and Potrero Capital Research. In terms of the portfolio weights assigned to each position Potrero Capital Research allocated the biggest weight to FARO Technologies, Inc. (NASDAQ:FARO), around 1.43% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, setting aside 0.61 percent of its 13F equity portfolio to FARO.
As industrywide interest jumped, key hedge funds were breaking ground themselves. Driehaus Capital, managed by Richard Driehaus, assembled the most outsized position in FARO Technologies, Inc. (NASDAQ:FARO). Driehaus Capital had $3.8 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $1.3 million position during the quarter. The only other fund with a brand new FARO position is Paul Marshall and Ian Wace’s Marshall Wace.
Let’s now review hedge fund activity in other stocks similar to FARO Technologies, Inc. (NASDAQ:FARO). We will take a look at HealthStream, Inc. (NASDAQ:HSTM), Odonate Therapeutics, Inc. (NASDAQ:ODT), Triumph Bancorp Inc (NASDAQ:TBK), and Golden Ocean Group Ltd (NASDAQ:GOGL). This group of stocks’ market caps are closest to FARO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HSTM | 11 | 41631 | -2 |
| ODT | 14 | 447024 | 1 |
| TBK | 6 | 29347 | -1 |
| GOGL | 7 | 205416 | 0 |
| Average | 9.5 | 180855 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $181 million. That figure was $48 million in FARO’s case. Odonate Therapeutics, Inc. (NASDAQ:ODT) is the most popular stock in this table. On the other hand Triumph Bancorp Inc (NASDAQ:TBK) is the least popular one with only 6 bullish hedge fund positions. FARO Technologies, Inc. (NASDAQ:FARO) 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. 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 FARO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FARO investors were disappointed as the stock returned 0.8% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
