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Is Heritage Financial Corporation (HFWA) A Good Stock To Buy ?

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Abigail Fisher
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"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Heritage Financial Corporation (NASDAQ:HFWA) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Heritage Financial Corporation (NASDAQ:HFWA) investors should be aware of an increase in hedge fund sentiment of late. Our calculations also showed that HFWA isn't among the 30 most popular stocks among hedge funds (see the video below).

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

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.

HFWA_oct2019
HFWA_oct2019

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. Let's check out the fresh hedge fund action surrounding Heritage Financial Corporation (NASDAQ:HFWA).

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

At the end of the second quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from the first quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in HFWA a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Matthew Lindenbaum Basswood Capital
Matthew Lindenbaum Basswood Capital

Of the funds tracked by Insider Monkey, Amy Minella's Cardinal Capital has the biggest position in Heritage Financial Corporation (NASDAQ:HFWA), worth close to $18.5 million, comprising 0.6% of its total 13F portfolio. Sitting at the No. 2 spot is Forest Hill Capital, managed by Mark Lee, which holds a $7.7 million position; 2.7% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions consist of Israel Englander's Millennium Management, Matthew Lindenbaum's Basswood Capital and Paul Marshall and Ian Wace's Marshall Wace LLP.

As one would reasonably expect, specific money managers were breaking ground themselves. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, established the most outsized position in Heritage Financial Corporation (NASDAQ:HFWA). Marshall Wace LLP had $3 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also made a $0.4 million investment in the stock during the quarter.

Let's now review 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 Southside Bancshares, Inc. (NASDAQ:SBSI), CBIZ, Inc. (NYSE:CBZ), Cortexyme, Inc. (NASDAQ:CRTX), and Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW). All of these stocks' market caps match HFWA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBSI,7,59491,0 CBZ,14,150330,-2 CRTX,2,3311,2 AAWW,16,71856,-3 Average,9.75,71247,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $46 million in HFWA's case. Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is the most popular stock in this table. On the other hand Cortexyme, Inc. (NASDAQ:CRTX) is the least popular one with only 2 bullish hedge fund positions. Heritage Financial Corporation (NASDAQ:HFWA) is not the least popular stock in this group but hedge fund interest is still below average. 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HFWA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); HFWA investors were disappointed as the stock returned -8.1% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

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