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Is UCTT A Good Stock To Buy Now?

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Asma UL Husna
·6 min read
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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Ultra Clean Holdings Inc (NASDAQ:UCTT).

Ultra Clean Holdings Inc (NASDAQ:UCTT) has seen a decrease in hedge fund interest of late. Ultra Clean Holdings Inc (NASDAQ:UCTT) was in 20 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 24. There were 22 hedge funds in our database with UCTT holdings at the end of June. Our calculations also showed that UCTT 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Driehaus of Driehaus Capital

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. Keeping this in mind we're going to check out the latest hedge fund action encompassing Ultra Clean Holdings Inc (NASDAQ:UCTT).

Do Hedge Funds Think UCTT Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in UCTT 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, Driehaus Capital held the most valuable stake in Ultra Clean Holdings Inc (NASDAQ:UCTT), which was worth $24.3 million at the end of the third quarter. On the second spot was Divisar Capital which amassed $24.2 million worth of shares. Royce & Associates, Arrowstreet Capital, and G2 Investment Partners Management 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 Divisar Capital allocated the biggest weight to Ultra Clean Holdings Inc (NASDAQ:UCTT), around 8.01% of its 13F portfolio. Lyon Street Capital is also relatively very bullish on the stock, designating 2.56 percent of its 13F equity portfolio to UCTT.

Seeing as Ultra Clean Holdings Inc (NASDAQ:UCTT) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few fund managers who were dropping their full holdings heading into Q4. Interestingly, D. E. Shaw's D E Shaw sold off the biggest stake of the "upper crust" of funds tracked by Insider Monkey, valued at close to $1.6 million in stock, and Renaissance Technologies was right behind this move, as the fund dropped about $1 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 2 funds heading into Q4.

Let's go over hedge fund activity in other stocks similar to Ultra Clean Holdings Inc (NASDAQ:UCTT). These stocks are First Busey Corporation (NASDAQ:BUSE), iTeos Therapeutics, Inc. (NASDAQ:ITOS), Redwood Trust, Inc. (NYSE:RWT), Eagle Bancorp, Inc. (NASDAQ:EGBN), BGC Partners, Inc. (NASDAQ:BGCP), John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS), and The RMR Group Inc. (NASDAQ:RMR). All of these stocks' market caps match UCTT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BUSE,15,31527,2 ITOS,11,191852,11 RWT,15,42065,-3 EGBN,13,16947,-2 BGCP,23,110947,-5 JBSS,14,67309,0 RMR,13,80620,-1 Average,14.9,77324,0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.9 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $93 million in UCTT's case. BGC Partners, Inc. (NASDAQ:BGCP) is the most popular stock in this table. On the other hand iTeos Therapeutics, Inc. (NASDAQ:ITOS) is the least popular one with only 11 bullish hedge fund positions. Ultra Clean Holdings Inc (NASDAQ:UCTT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for UCTT is 65.5. 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. 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 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on UCTT as the stock returned 59% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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