Did Hedge Funds Make The Right Call On Colfax Corporation (CFX) ?

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 Colfax Corporation (NYSE:CFX) and determine whether hedge funds had an edge regarding this stock.

Colfax Corporation (NYSE:CFX) was in 32 hedge funds’ portfolios at the end of the first quarter of 2020. CFX investors should be aware of a decrease in hedge fund interest of late. There were 43 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 (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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to take a glance at the fresh hedge fund action regarding Colfax Corporation (NYSE:CFX).

Hedge fund activity in Colfax Corporation (NYSE:CFX)

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -26% from the previous quarter. On the other hand, there were a total of 32 hedge funds with a bullish position in CFX a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Among these funds, Diamond Hill Capital held the most valuable stake in Colfax Corporation (NYSE:CFX), which was worth $77.4 million at the end of the third quarter. On the second spot was Cardinal Capital which amassed $67.9 million worth of shares. Royce & Associates, Eminence Capital, and Markel Gayner Asset 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 Cove Street Capital allocated the biggest weight to Colfax Corporation (NYSE:CFX), around 4.51% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, designating 3.34 percent of its 13F equity portfolio to CFX.

Due to the fact that Colfax Corporation (NYSE:CFX) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that slashed their entire stakes in the first quarter. It’s worth mentioning that Wallace Weitz’s Wallace R. Weitz & Co. sold off the largest investment of the 750 funds watched by Insider Monkey, worth an estimated $45.4 million in stock, and Charles Davidson and Joseph Jacobs’s Wexford Capital was right behind this move, as the fund cut about $36 million worth. These moves are interesting, as total hedge fund interest fell by 11 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Colfax Corporation (NYSE:CFX) but similarly valued. These stocks are United Bankshares, Inc. (NASDAQ:UBSI), Taro Pharmaceutical Industries Ltd. (NYSE:TARO), Natera Inc (NASDAQ:NTRA), and Wingstop Inc (NASDAQ:WING). All of these stocks’ market caps are closest to CFX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UBSI 13 46714 -5
TARO 9 64708 -3
NTRA 32 392988 -1
WING 27 264265 3
Average 20.25 192169 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $421 million in CFX’s case. Natera Inc (NASDAQ:NTRA) is the most popular stock in this table. On the other hand Taro Pharmaceutical Industries Ltd. (NYSE:TARO) 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 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on CFX as the stock returned 40.9% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Follow Colfax Corp (NYSE:CFX)

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