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Did Hedge Funds Make The Right Call On Fabrinet (FN) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Fabrinet (NYSE:FN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Fabrinet (NYSE:FN) has seen a decrease in enthusiasm from smart money lately. Our calculations also showed that FN 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 market participants, hedge funds are assumed to be underperforming, old investment vehicles of years past. While there are over 8000 funds trading at present, We hone in on the crème de la crème of this group, around 850 funds. It is estimated that this group of investors shepherd bulk of all hedge funds’ total capital, and by watching their best investments, Insider Monkey has spotted many investment strategies that have historically beaten the broader indices. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year 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 .

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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. 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 if you have any good ideas send us an email. Now let’s analyze the key hedge fund action regarding Fabrinet (NYSE:FN).

What have hedge funds been doing with Fabrinet (NYSE:FN)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in FN a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of Fabrinet (NYSE:FN), with a stake worth $33.6 million reported as of the end of September. Trailing Royce & Associates was Citadel Investment Group, which amassed a stake valued at $27.2 million. Divisar Capital, Shelter Haven Capital Management, and Renaissance Technologies 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 Fabrinet (NYSE:FN), around 6.42% of its 13F portfolio. Shelter Haven Capital Management is also relatively very bullish on the stock, dishing out 5.92 percent of its 13F equity portfolio to FN.

Since Fabrinet (NYSE:FN) has faced falling interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of funds who sold off their entire stakes in the first quarter. At the top of the heap, Clifton S. Robbins’s Blue Harbour Group cut the biggest investment of all the hedgies watched by Insider Monkey, totaling an estimated $46.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also cut its stock, about $4.1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 3 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Fabrinet (NYSE:FN). These stocks are Select Medical Holdings Corporation (NYSE:SEM), TC Pipelines, LP (NYSE:TCP), Associated Banc Corp (NYSE:ASB), and Paramount Group Inc (NYSE:PGRE). This group of stocks’ market caps resemble FN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SEM 18 106537 -3
TCP 2 9665 -1
ASB 16 124559 -8
PGRE 19 154841 -1
Average 13.75 98901 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $99 million. That figure was $133 million in FN’s case. Paramount Group Inc (NYSE:PGRE) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Fabrinet (NYSE:FN) is more popular among hedge funds. 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 and still beat the market by 15.5 percentage points. Unfortunately FN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FN were disappointed as the stock returned 14.4% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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