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Did Hedge Funds Make The Right Call On FormFactor, Inc. (FORM) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of FormFactor, Inc. (NASDAQ:FORM) based on that data and determine whether they were really smart about the stock.

Hedge fund interest in FormFactor, Inc. (NASDAQ:FORM) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare FORM to other stocks including Macy’s, Inc. (NYSE:M), Aaron’s, Inc. (NYSE:AAN), and First Midwest Bancorp Inc (NASDAQ:FMBI) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Driehaus of Driehaus 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 we’re going to review the key hedge fund action encompassing FormFactor, Inc. (NASDAQ:FORM).

Hedge fund activity in FormFactor, Inc. (NASDAQ:FORM)

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in FORM a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in FormFactor, Inc. (NASDAQ:FORM), which was worth $24.2 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $15.7 million worth of shares. Millennium Management, Driehaus Capital, and Arrowstreet Capital 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 Zebra Capital Management allocated the biggest weight to FormFactor, Inc. (NASDAQ:FORM), around 0.77% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, setting aside 0.59 percent of its 13F equity portfolio to FORM.

Due to the fact that FormFactor, Inc. (NASDAQ:FORM) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there is a sect of money managers that slashed their entire stakes last quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP said goodbye to the largest position of the 750 funds tracked by Insider Monkey, worth an estimated $5.4 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund dropped about $1.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as FormFactor, Inc. (NASDAQ:FORM) but similarly valued. These stocks are Macy’s, Inc. (NYSE:M), Aaron’s, Inc. (NYSE:AAN), First Midwest Bancorp Inc (NASDAQ:FMBI), and Workiva Inc (NYSE:WK). This group of stocks’ market caps match FORM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
M 30 355877 -2
AAN 25 163879 -7
FMBI 11 37778 0
WK 16 125379 -1
Average 20.5 170728 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $171 million. That figure was $93 million in FORM’s case. Macy’s, Inc. (NYSE:M) is the most popular stock in this table. On the other hand First Midwest Bancorp Inc (NASDAQ:FMBI) is the least popular one with only 11 bullish hedge fund positions. FormFactor, Inc. (NASDAQ:FORM) 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 FORM as the stock returned 46% in Q2 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.