Were Hedge Funds Right About Selling Ultra Clean Holdings Inc (UCTT)?

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Ultra Clean Holdings Inc (NASDAQ:UCTT).

Is Ultra Clean Holdings Inc (NASDAQ:UCTT) a cheap investment today? Hedge funds were selling. The number of bullish hedge fund bets dropped by 4 recently. Ultra Clean Holdings Inc (NASDAQ:UCTT) was in 17 hedge funds’ portfolios at the end of March. The all time high for this statistic is 24. Our calculations also showed that UCTT isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 21 hedge funds in our database with UCTT positions at the end of the fourth quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let’s take a glance at the key hedge fund action surrounding Ultra Clean Holdings Inc (NASDAQ:UCTT).

Do Hedge Funds Think UCTT Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from the fourth quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in UCTT 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.

More specifically, Driehaus Capital was the largest shareholder of Ultra Clean Holdings Inc (NASDAQ:UCTT), with a stake worth $74.7 million reported as of the end of March. Trailing Driehaus Capital was Royce & Associates, which amassed a stake valued at $46.1 million. Divisar Capital, Arrowstreet Capital, and G2 Investment Partners Management 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 Ultra Clean Holdings Inc (NASDAQ:UCTT), around 5.91% of its 13F portfolio. G2 Investment Partners Management is also relatively very bullish on the stock, designating 1.31 percent of its 13F equity portfolio to UCTT.

Seeing as Ultra Clean Holdings Inc (NASDAQ:UCTT) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of funds that elected to cut their positions entirely in the first quarter. At the top of the heap, Louis Navellier’s Navellier & Associates said goodbye to the largest stake of the 750 funds watched by Insider Monkey, worth close to $2 million in stock. Renaissance Technologies, also cut its stock, about $1.9 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 4 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Ultra Clean Holdings Inc (NASDAQ:UCTT). These stocks are Boise Cascade Co (NYSE:BCC), Avaya Holdings Corp. (NYSE:AVYA), Himax Technologies, Inc. (NASDAQ:HIMX), Helios Technologies, Inc. (NASDAQ:HLIO), Niu Technologies (NASDAQ:NIU), First Financial Bancorp (NASDAQ:FFBC), and Washington Federal Inc. (NASDAQ:WAFD). This group of stocks’ market values resemble UCTT’s market value.

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As you can see these stocks had an average of 17.3 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $189 million in UCTT’s case. Avaya Holdings Corp. (NYSE:AVYA) is the most popular stock in this table. On the other hand Helios Technologies, Inc. (NASDAQ:HLIO) is the least popular one with only 7 bullish hedge fund positions. Ultra Clean Holdings Inc (NASDAQ:UCTT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for UCTT is 38.9. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately UCTT wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); UCTT investors were disappointed as the stock returned -10.6% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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