Heritage Financial Corporation (HFWA): Hedge Funds In Wait-and-See Mode

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Heritage Financial Corporation (NASDAQ:HFWA) based on that data.

Hedge fund interest in Heritage Financial Corporation (NASDAQ:HFWA) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Aprea Therapeutics, Inc. (NASDAQ:APRE), Applied Therapeutics, Inc. (NASDAQ:APLT), and Transportadora de Gas del Sur SA (NYSE:TGS) to gather more data points. Our calculations also showed that HFWA 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Matthew Lindenbaum of Basswood Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a glance at the new hedge fund action regarding Heritage Financial Corporation (NASDAQ:HFWA).

How have hedgies been trading Heritage Financial Corporation (NASDAQ:HFWA)?

At the end of the first quarter, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 7 hedge funds with a bullish position in HFWA a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

More specifically, Forest Hill Capital was the largest shareholder of Heritage Financial Corporation (NASDAQ:HFWA), with a stake worth $5.1 million reported as of the end of September. Trailing Forest Hill Capital was Basswood Capital, which amassed a stake valued at $4.6 million. Millennium Management, Citadel Investment Group, and Renaissance Technologies 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 Forest Hill Capital allocated the biggest weight to Heritage Financial Corporation (NASDAQ:HFWA), around 2.74% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, dishing out 0.54 percent of its 13F equity portfolio to HFWA.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace LLP. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Weld Capital Management).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Heritage Financial Corporation (NASDAQ:HFWA) but similarly valued. We will take a look at Aprea Therapeutics, Inc. (NASDAQ:APRE), Applied Therapeutics, Inc. (NASDAQ:APLT), Transportadora de Gas del Sur SA (NYSE:TGS), and Passage Bio, Inc. (NASDAQ:PASG). All of these stocks’ market caps are similar to HFWA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $159 million. That figure was $12 million in HFWA’s case. Passage Bio, Inc. (NASDAQ:PASG) is the most popular stock in this table. On the other hand Aprea Therapeutics, Inc. (NASDAQ:APRE) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Heritage Financial Corporation (NASDAQ:HFWA) is even less popular than APRE. Hedge funds dodged a bullet by taking a bearish stance towards HFWA. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th but managed to beat the market by 14.2 percentage points. Unfortunately HFWA wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); HFWA investors were disappointed as the stock returned -2.3% during the second quarter (through June 10th) 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 most of these stocks already outperformed the market so far in 2020.

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