Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.
Colfax Corporation (NYSE:CFX) was in 27 hedge funds' portfolios at the end of the second quarter of 2019. CFX investors should be aware of a decrease in enthusiasm from smart money lately. There were 32 hedge funds in our database with CFX holdings at the end of the previous quarter. Our calculations also showed that CFX isn't among the 30 most popular stocks among hedge funds (view the video below). 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to review the recent hedge fund action regarding Colfax Corporation (NYSE:CFX).
What does smart money think about Colfax Corporation (NYSE:CFX)?
At the end of the second quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CFX over the last 16 quarters. With hedge funds' capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Diamond Hill Capital, managed by Ric Dillon, holds the biggest position in Colfax Corporation (NYSE:CFX). Diamond Hill Capital has a $76.8 million position in the stock, comprising 0.4% of its 13F portfolio. The second most bullish fund manager is Cardinal Capital, managed by Amy Minella, which holds a $70.1 million position; the fund has 2.3% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism include Chuck Royce's Royce & Associates, Dan Loeb's Third Point and Charles Davidson and Joseph Jacobs's Wexford Capital.
Because Colfax Corporation (NYSE:CFX) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedgies that decided to sell off their entire stakes heading into Q3. It's worth mentioning that Robert Joseph Caruso's Select Equity Group dropped the largest investment of the "upper crust" of funds followed by Insider Monkey, valued at about $76.2 million in stock. David Rosen's fund, Rubric Capital Management, also cut its stock, about $30.1 million worth. These transactions are important to note, as total hedge fund interest dropped by 5 funds heading into Q3.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Colfax Corporation (NYSE:CFX) but similarly valued. We will take a look at Stitch Fix, Inc. (NASDAQ:SFIX), UMB Financial Corporation (NASDAQ:UMBF), Balchem Corporation (NASDAQ:BCPC), and Allegheny Technologies Incorporated (NYSE:ATI). All of these stocks' market caps resemble CFX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SFIX,28,261732,1 UMBF,16,80456,7 BCPC,9,64157,2 ATI,21,341152,-4 Average,18.5,186874,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $187 million. That figure was $552 million in CFX's case. Stitch Fix, Inc. (NASDAQ:SFIX) is the most popular stock in this table. On the other hand Balchem Corporation (NASDAQ:BCPC) is the least popular one with only 9 bullish hedge fund positions. Colfax Corporation (NYSE:CFX) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on CFX, though not to the same extent, as the stock returned 3.7% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.