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Hedge Funds Are Getting Bullish On Fabrinet (FN)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Fabrinet (NYSE:FN) and determine whether hedge funds skillfully traded this stock.

Is Fabrinet (NYSE:FN) ready to rally soon? The best stock pickers were becoming hopeful. The number of bullish hedge fund positions advanced by 1 lately. Fabrinet (NYSE:FN) was in 23 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. Our calculations also showed that FN isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 22 hedge funds in our database with FN holdings at the end of March.

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 56 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.

Ian Wace Marshall Wace

Ian Wace of Marshall Wace

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 precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a glance at the key hedge fund action regarding Fabrinet (NYSE:FN).

Hedge fund activity in Fabrinet (NYSE:FN)

At Q2’s end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in FN 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.

The largest stake in Fabrinet (NYSE:FN) was held by Royce & Associates, which reported holding $35.6 million worth of stock at the end of September. It was followed by Divisar Capital with a $17 million position. Other investors bullish on the company included Renaissance Technologies, Marshall Wace LLP, and Millennium Management. In terms of the portfolio weights assigned to each position Divisar Capital allocated the biggest weight to Fabrinet (NYSE:FN), around 4.92% of its 13F portfolio. Intrepid Capital Management is also relatively very bullish on the stock, dishing out 1.19 percent of its 13F equity portfolio to FN.

Now, some big names have jumped into Fabrinet (NYSE:FN) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, established the largest position in Fabrinet (NYSE:FN). Marshall Wace LLP had $10.1 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $4.9 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Paul Tudor Jones’s Tudor Investment Corp, and Greg Eisner’s Engineers Gate Manager.

Let’s check out hedge fund activity in other stocks similar to Fabrinet (NYSE:FN). These stocks are MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI), Colliers International Group Inc (NASDAQ:CIGI), Tootsie Roll Industries, Inc. (NYSE:TR), Opko Health Inc. (NASDAQ:OPK), Telephone & Data Systems, Inc. (NYSE:TDS), Sterling Bancorp (NYSE:STL), and Old National Bancorp (NASDAQ:ONB). This group of stocks’ market values are similar to FN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MTSI 23 290386 7
CIGI 11 527308 1
TR 19 81934 5
OPK 16 51806 3
TDS 21 175372 0
STL 27 179819 2
ONB 17 25811 2
Average 19.1 190348 2.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.1 hedge funds with bullish positions and the average amount invested in these stocks was $190 million. That figure was $121 million in FN’s case. Sterling Bancorp (NYSE:STL) is the most popular stock in this table. On the other hand Colliers International Group Inc (NASDAQ:CIGI) is the least popular one with only 11 bullish hedge fund positions. Fabrinet (NYSE:FN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FN is 71.1. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and beat the market by 19.3 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 1% in Q3 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 many of these stocks already outperformed the market so far this year.

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