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Were Hedge Funds Right About Heritage Financial Corporation (HFWA)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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 use that wealth of knowledge to determine whether or not Heritage Financial Corporation (NASDAQ:HFWA) makes for a good investment right now. Heritage Financial Corporation (NASDAQ:HFWA) was in 6 hedge funds’ portfolios at the end of December. HFWA investors should be aware of a decrease in hedge fund sentiment in recent months. There were 10 hedge funds in our database with HFWA holdings at the end of the previous quarter. Our calculations also showed that HFWA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

In the 21st century investor’s toolkit there are dozens of metrics stock traders employ to assess publicly traded companies. A pair of the most useful metrics are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the top hedge fund managers can beat their index-focused peers by a solid margin (see the details here).

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the new hedge fund action surrounding Heritage Financial Corporation (NASDAQ:HFWA).

What have hedge funds been doing with Heritage Financial Corporation (NASDAQ:HFWA)?

At Q4’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -40% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HFWA over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Mark Lee’s Forest Hill Capital has the largest position in Heritage Financial Corporation (NASDAQ:HFWA), worth close to $7.4 million, comprising 2.4% of its total 13F portfolio. On Forest Hill Capital’s heels is Basswood Capital, managed by Matthew Lindenbaum, which holds a $6.5 million position; 0.5% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism encompass Israel Englander’s Millennium Management, Ken Griffin’s Citadel Investment Group and Paul Marshall and Ian Wace’s Marshall Wace LLP. In terms of the portfolio weights assigned to each position Forest Hill Capital allocated the biggest weight to Heritage Financial Corporation (NASDAQ:HFWA), around 2.44% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, dishing out 0.46 percent of its 13F equity portfolio to HFWA.

Judging by the fact that Heritage Financial Corporation (NASDAQ:HFWA) has witnessed declining sentiment from the smart money, it’s safe to say that there were a few funds that elected to cut their full holdings by the end of the third quarter. Interestingly, Amy Minella’s Cardinal Capital dropped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising about $11 million in stock. Paul Tudor Jones’s fund, Tudor Investment Corp, also dropped its stock, about $0.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Heritage Financial Corporation (NASDAQ:HFWA) but similarly valued. These stocks are Luminex Corporation (NASDAQ:LMNX), Odonate Therapeutics, Inc. (NASDAQ:ODT), Lindsay Corporation (NYSE:LNN), and Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (NYSE:VLRS). This group of stocks’ market values are closest to HFWA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LMNX 17 180184 1
ODT 15 556075 1
LNN 9 202475 1
VLRS 11 114895 3
Average 13 263407 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $263 million. That figure was $23 million in HFWA’s case. Luminex Corporation (NASDAQ:LMNX) is the most popular stock in this table. On the other hand Lindsay Corporation (NYSE:LNN) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Heritage Financial Corporation (NASDAQ:HFWA) is even less popular than LNN. Hedge funds dodged a bullet by taking a bearish stance towards HFWA. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but managed to beat the market by 12.9 percentage points. Unfortunately HFWA wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); HFWA investors were disappointed as the stock returned -30.8% during the same time period 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 so far in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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