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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards FARO Technologies, Inc. (NASDAQ:FARO) to find out whether there were any major changes in hedge funds' views.
Is FARO a good stock to buy now? Investors who are in the know were in a bearish mood. The number of bullish hedge fund bets were trimmed by 5 lately. FARO Technologies, Inc. (NASDAQ:FARO) was in 11 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 16. 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 for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
If you'd ask most investors, hedge funds are seen as worthless, outdated financial vehicles of the past. While there are over 8000 funds with their doors open today, Our researchers choose to focus on the crème de la crème of this group, approximately 850 funds. These money managers control the majority of all hedge funds' total capital, and by paying attention to their first-class investments, Insider Monkey has discovered various investment strategies that have historically outpaced the broader indices. Insider Monkey's flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 13% since February 2017 (through November 17th) even though the market was up 65% during the same period. We just shared a list of 6 short targets in our latest quarterly update .
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's take a peek at the fresh hedge fund action encompassing FARO Technologies, Inc. (NASDAQ:FARO).
Do Hedge Funds Think FARO Is A Good Stock To Buy Now?
At third quarter's end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -31% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FARO over the last 21 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Royce & Associates held the most valuable stake in FARO Technologies, Inc. (NASDAQ:FARO), which was worth $71.5 million at the end of the third quarter. On the second spot was Paradice Investment Management which amassed $49.8 million worth of shares. Renaissance Technologies, Prospector Partners, and Provenire 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 Provenire Capital allocated the biggest weight to FARO Technologies, Inc. (NASDAQ:FARO), around 3.94% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, designating 3.61 percent of its 13F equity portfolio to FARO.
Judging by the fact that FARO Technologies, Inc. (NASDAQ:FARO) has faced bearish sentiment from the smart money, logic holds that there is a sect of fund managers that elected to cut their entire stakes last quarter. Intriguingly, Paul Marshall and Ian Wace's Marshall Wace LLP dropped the largest position of the "upper crust" of funds tracked by Insider Monkey, comprising an estimated $0.7 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dumped its stock, about $0.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 5 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as FARO Technologies, Inc. (NASDAQ:FARO) but similarly valued. We will take a look at Adaptimmune Therapeutics plc (NASDAQ:ADAP), Constellium SE (NYSE:CSTM), Marcus & Millichap Inc (NYSE:MMI), Cadence Bancorporation (NYSE:CADE), The Pennant Group, Inc. (NASDAQ:PNTG), Linx S.A. (NYSE:LINX), and Kaman Corporation (NYSE:KAMN). This group of stocks' market caps match FARO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADAP,17,648155,-2 CSTM,30,180519,-2 MMI,5,67635,-3 CADE,22,110929,1 PNTG,15,30509,5 LINX,5,33977,2 KAMN,12,138073,-1 Average,15.1,172828,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.1 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $145 million in FARO's case. Constellium SE (NYSE:CSTM) is the most popular stock in this table. On the other hand Marcus & Millichap Inc (NYSE:MMI) is the least popular one with only 5 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. Our overall hedge fund sentiment score for FARO is 32.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and surpassed the market again by 16.2 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 10.1% since the end of September (through 12/8) 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.