How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Fabrinet (NYSE:FN).
Is Fabrinet (NYSE:FN) a buy right now? Investors who are in the know are in a bearish mood. The number of bullish hedge fund bets fell by 4 recently. Our calculations also showed that FN 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.
Chuck Royce of Royce & Associates
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to review the new hedge fund action surrounding Fabrinet (NYSE:FN).
How are hedge funds trading Fabrinet (NYSE:FN)?
At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards FN over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Fabrinet (NYSE:FN) was held by Royce & Associates, which reported holding $41.6 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $26.5 million position. Other investors bullish on the company included Blue Harbour Group, Point72 Asset Management, and Divisar Capital. In terms of the portfolio weights assigned to each position Divisar Capital allocated the biggest weight to Fabrinet (NYSE:FN), around 4.15% of its 13F portfolio. Blue Harbour Group is also relatively very bullish on the stock, dishing out 1.44 percent of its 13F equity portfolio to FN.
Since Fabrinet (NYSE:FN) has witnessed bearish sentiment from the smart money, it’s easy to see that there was a specific group of money managers who sold off their positions entirely last quarter. Intriguingly, Charles Clough’s Clough Capital Partners said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, valued at about $8.2 million in stock. Charles Davidson and Joseph Jacobs’s fund, Wexford Capital, also cut its stock, about $1.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Fabrinet (NYSE:FN). These stocks are Carbon Black, Inc. (NASDAQ:CBLK), Crocs, Inc. (NASDAQ:CROX), Qudian Inc. (NYSE:QD), and Xencor Inc (NASDAQ:XNCR). All of these stocks’ market caps are similar to FN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBLK | 21 | 352066 | 4 |
| CROX | 27 | 417916 | 6 |
| QD | 12 | 80964 | -10 |
| XNCR | 12 | 139670 | 0 |
| Average | 18 | 247654 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $248 million. That figure was $176 million in FN’s case. Crocs, Inc. (NASDAQ:CROX) is the most popular stock in this table. On the other hand Qudian Inc. (NYSE:QD) is the least popular one with only 12 bullish hedge fund positions. Fabrinet (NYSE:FN) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on FN as the stock returned 15.7% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
