Did Hedge Funds Make The Right Call On First Republic Bank (FRC) ?

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 First Republic Bank (NYSE:FRC) and determine whether hedge funds skillfully traded this stock.

First Republic Bank (NYSE:FRC) was in 28 hedge funds’ portfolios at the end of the first quarter of 2020. FRC has experienced an increase in activity from the world’s largest hedge funds in recent months. There were 27 hedge funds in our database with FRC positions at the end of the previous quarter. Our calculations also showed that FRC 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.

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.

James Dondero of Highland Capital Management

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 fresh hedge fund action regarding First Republic Bank (NYSE:FRC).

What does smart money think about First Republic Bank (NYSE:FRC)?

Heading into the second quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the fourth quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in FRC a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in First Republic Bank (NYSE:FRC) was held by Select Equity Group, which reported holding $433.9 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $227.4 million position. Other investors bullish on the company included Citadel Investment Group, Balyasny Asset Management, and D E Shaw. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to First Republic Bank (NYSE:FRC), around 2.99% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, dishing out 1.54 percent of its 13F equity portfolio to FRC.

As aggregate interest increased, some big names have jumped into First Republic Bank (NYSE:FRC) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in First Republic Bank (NYSE:FRC). Balyasny Asset Management had $24.5 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also made a $2 million investment in the stock during the quarter. The other funds with brand new FRC positions are Paul Marshall and Ian Wace’s Marshall Wace LLP, Peter Seuss’s Prana Capital Management, and Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks similar to First Republic Bank (NYSE:FRC). These stocks are Altice USA, Inc. (NYSE:ATUS), Cardinal Health, Inc. (NYSE:CAH), Campbell Soup Company (NYSE:CPB), and Trip.com Group Limited (NASDAQ:TCOM). All of these stocks’ market caps are closest to FRC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.5 hedge funds with bullish positions and the average amount invested in these stocks was $1134 million. That figure was $916 million in FRC’s case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand Trip.com Group Limited (NASDAQ:TCOM) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks First Republic Bank (NYSE:FRC) is even less popular than TCOM. Hedge funds clearly dropped the ball on FRC as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on FRC as the stock returned 29.1% in the second quarter and outperformed the market by an even larger margin.

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