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 FARO Technologies, Inc. (NASDAQ:FARO) and determine whether hedge funds had an edge regarding this stock.
FARO Technologies, Inc. (NASDAQ:FARO) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds' portfolios at the end of the first quarter of 2020. 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 Hollysys Automation Technologies Ltd (NASDAQ:HOLI), Golar LNG Limited (NASDAQ:GLNG), and Unitil Corporation (NYSE:UTL) to gather more data points. Our calculations also showed that FARO 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.
According to most stock holders, hedge funds are viewed as slow, outdated financial vehicles of yesteryear. While there are more than 8000 funds in operation at the moment, We look at the bigwigs of this group, approximately 850 funds. Most estimates calculate that this group of people preside over the lion's share of the hedge fund industry's total capital, and by monitoring their finest investments, Insider Monkey has deciphered numerous investment strategies that have historically beaten the broader indices. Insider Monkey's flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
[caption id="attachment_26357" align="aligncenter" width="359"] Ken Fisher of Fisher Asset Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a glance at the recent hedge fund action regarding FARO Technologies, Inc. (NASDAQ:FARO).
Hedge fund activity in FARO Technologies, Inc. (NASDAQ:FARO)
At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 7 hedge funds held shares or bullish call options in FARO a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in FARO Technologies, Inc. (NASDAQ:FARO) was held by Royce & Associates, which reported holding $60 million worth of stock at the end of September. It was followed by Paradice Investment Management with a $39.5 million position. Other investors bullish on the company included Prospector Partners, Citadel Investment Group, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Paradice Investment Management allocated the biggest weight to FARO Technologies, Inc. (NASDAQ:FARO), around 4.38% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.82 percent of its 13F equity portfolio to FARO.
Since FARO Technologies, Inc. (NASDAQ:FARO) has witnessed falling interest from hedge fund managers, it's easy to see that there exists a select few fund managers that decided to sell off their entire stakes by the end of the first quarter. Intriguingly, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors dropped the largest stake of the 750 funds monitored by Insider Monkey, worth about $0.5 million in stock, and Donald Sussman's Paloma Partners was right behind this move, as the fund said goodbye to about $0.3 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to FARO Technologies, Inc. (NASDAQ:FARO). We will take a look at Hollysys Automation Technologies Ltd (NASDAQ:HOLI), Golar LNG Limited (NASDAQ:GLNG), Unitil Corporation (NYSE:UTL), and Rent-A-Center Inc (NASDAQ:RCII). This group of stocks' market valuations are similar to FARO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HOLI,12,41739,0 GLNG,10,153667,-9 UTL,9,62219,-3 RCII,19,201014,-6 Average,12.5,114660,-4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $115 million. That figure was $112 million in FARO's case. Rent-A-Center Inc (NASDAQ:RCII) is the most popular stock in this table. On the other hand Unitil Corporation (NYSE:UTL) is the least popular one with only 9 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 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. A small number of hedge funds were also right about betting on FARO, though not to the same extent, as the stock returned 20.4% during the second quarter and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.