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Is Onto Innovation Inc. (ONTO) A Good Stock To Buy?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Onto Innovation Inc. (NYSE:ONTO) and determine whether the smart money was really smart about this stock.

Onto Innovation Inc. (NYSE:ONTO) has experienced a decrease in hedge fund sentiment lately. ONTO was in 11 hedge funds’ portfolios at the end of the first quarter of 2020. There were 14 hedge funds in our database with ONTO positions at the end of the previous quarter. Our calculations also showed that ONTO 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to analyze the latest hedge fund action encompassing Onto Innovation Inc. (NYSE:ONTO).

How have hedgies been trading Onto Innovation Inc. (NYSE:ONTO)?

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in ONTO 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.

Of the funds tracked by Insider Monkey, Renaissance Technologies, holds the biggest position in Onto Innovation Inc. (NYSE:ONTO). Renaissance Technologies has a $53.5 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, managed by Ken Fisher, which holds a $26.2 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish encompass Chuck Royce’s Royce & Associates, Tim Curro’s Value Holdings LP and Ian Simm’s Impax Asset Management. In terms of the portfolio weights assigned to each position Value Holdings LP allocated the biggest weight to Onto Innovation Inc. (NYSE:ONTO), around 2.68% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.35 percent of its 13F equity portfolio to ONTO.

Seeing as Onto Innovation Inc. (NYSE:ONTO) has faced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of funds that elected to cut their positions entirely heading into Q4. It’s worth mentioning that Israel Englander’s Millennium Management sold off the largest stake of all the hedgies followed by Insider Monkey, comprising about $4.3 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund dumped about $2.3 million worth. These moves are interesting, as total hedge fund interest fell by 3 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Onto Innovation Inc. (NYSE:ONTO) but similarly valued. These stocks are Moelis & Company (NYSE:MC), Penn National Gaming, Inc (NASDAQ:PENN), Cabot Corporation (NYSE:CBT), and Insight Enterprises, Inc. (NASDAQ:NSIT). All of these stocks’ market caps resemble ONTO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MC 10 37457 -3
PENN 18 73094 -9
CBT 23 58355 -6
NSIT 13 65128 -5
Average 16 58509 -5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $123 million in ONTO’s case. Cabot Corporation (NYSE:CBT) is the most popular stock in this table. On the other hand Moelis & Company (NYSE:MC) is the least popular one with only 10 bullish hedge fund positions. Onto Innovation Inc. (NYSE:ONTO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately ONTO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ONTO investors were disappointed as the stock returned 14.7% 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.