Hedge Funds Keep Selling First American Financial Corp (FAF)

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards First American Financial Corp (NYSE:FAF).

First American Financial Corp (NYSE:FAF) was in 31 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 44. FAF shareholders have witnessed a decrease in hedge fund interest of late. There were 32 hedge funds in our database with FAF positions at the end of the first quarter. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Parag Vora of HG Vora Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. Keeping this in mind we’re going to go over the key hedge fund action surrounding First American Financial Corp (NYSE:FAF).

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

At the end of June, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the first quarter of 2020. By comparison, 44 hedge funds held shares or bullish call options in FAF a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in First American Financial Corp (NYSE:FAF) was held by HG Vora Capital Management, which reported holding $389.7 million worth of stock at the end of June. It was followed by Ariel Investments with a $337.3 million position. Other investors bullish on the company included Lakewood Capital Management, D E Shaw, and Clough Capital Partners. In terms of the portfolio weights assigned to each position HG Vora Capital Management allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 17.58% of its 13F portfolio. Lakewood Capital Management is also relatively very bullish on the stock, dishing out 3.41 percent of its 13F equity portfolio to FAF.

Since First American Financial Corp (NYSE:FAF) has faced a decline in interest from the smart money, logic holds that there is a sect of hedge funds who sold off their positions entirely in the second quarter. It’s worth mentioning that David Rodriguez-Fraile’s BlueMar Capital Management dropped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, valued at close to $6.1 million in stock, and Mark Coe’s Intrinsic Edge Capital was right behind this move, as the fund cut about $4.2 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 1 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to First American Financial Corp (NYSE:FAF). We will take a look at Angi Inc. (NASDAQ:ANGI), Stifel Financial Corp. (NYSE:SF), Marriott Vacations Worldwide Corporation (NYSE:VAC), Brixmor Property Group Inc (NYSE:BRX), Petco Health and Wellness Company, Inc. (NASDAQ:WOOF), Wyndham Hotels & Resorts, Inc. (NYSE:WH), and First Industrial Realty Trust, Inc. (NYSE:FR). This group of stocks’ market values resemble FAF’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $438 million. That figure was $1225 million in FAF’s case. Marriott Vacations Worldwide Corporation (NYSE:VAC) is the most popular stock in this table. On the other hand Brixmor Property Group Inc (NYSE:BRX) is the least popular one with only 21 bullish hedge fund positions. First American Financial Corp (NYSE:FAF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FAF is 60.9. 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. 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 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Hedge funds were also right about betting on FAF as the stock returned 18.2% since the end of Q2 (through 10/15) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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