Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That’s why we pay special attention to hedge fund activity in these stocks.
Is First American Financial Corp (NYSE:FAF) worth your attention right now? Prominent investors are getting more bullish. The number of bullish hedge fund bets increased by 4 in recent months. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (view the video below). FAF was in 34 hedge funds’ portfolios at the end of the second quarter of 2019. There were 30 hedge funds in our database with FAF positions at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a glance at the recent hedge fund action encompassing First American Financial Corp (NYSE:FAF).
What have hedge funds been doing with First American Financial Corp (NYSE:FAF)?
At Q2’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in FAF 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.
The largest stake in First American Financial Corp (NYSE:FAF) was held by Ariel Investments, which reported holding $216 million worth of stock at the end of March. It was followed by AQR Capital Management with a $103.2 million position. Other investors bullish on the company included Citadel Investment Group, Fisher Asset Management, and D E Shaw.
Now, key hedge funds were leading the bulls’ herd. Point72 Asset Management, managed by Steve Cohen, established the largest position in First American Financial Corp (NYSE:FAF). Point72 Asset Management had $20.4 million invested in the company at the end of the quarter. Andrew Sandler’s Sandler Capital Management also made a $7.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Benjamin A. Smith’s Laurion Capital Management, Paul Tudor Jones’s Tudor Investment Corp, and Matthew Tewksbury’s Stevens Capital Management.
Let’s now review hedge fund activity in other stocks similar to First American Financial Corp (NYSE:FAF). We will take a look at NovoCure Limited (NASDAQ:NVCR), Hanesbrands Inc. (NYSE:HBI), CDK Global Inc (NASDAQ:CDK), and Enable Midstream Partners LP (NYSE:ENBL). This group of stocks’ market caps match FAF’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NVCR | 22 | 426721 | -3 |
| HBI | 22 | 402748 | -8 |
| CDK | 29 | 432354 | 6 |
| ENBL | 7 | 40315 | 2 |
| Average | 20 | 325535 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $326 million. That figure was $772 million in FAF’s case. CDK Global Inc (NASDAQ:CDK) is the most popular stock in this table. On the other hand Enable Midstream Partners LP (NYSE:ENBL) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks First American Financial Corp (NYSE:FAF) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on FAF as the stock returned 10.7% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
