We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of First Republic Bank (NYSE:FRC) based on that data.
First Republic Bank (NYSE:FRC) investors should pay attention to an increase in support from the world’s most elite money managers lately. FRC was in 27 hedge funds’ portfolios at the end of December. There were 20 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 Q4 rankings and see the video at the end of this article for Q3 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 41 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.
James Dondero of Highland Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. With all of this in mind we’re going to take a look at the new hedge fund action regarding First Republic Bank (NYSE:FRC).
What does smart money think about First Republic Bank (NYSE:FRC)?
Heading into the first quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 35% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in FRC over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Select Equity Group was the largest shareholder of First Republic Bank (NYSE:FRC), with a stake worth $503.2 million reported as of the end of September. Trailing Select Equity Group was Diamond Hill Capital, which amassed a stake valued at $317 million. GLG Partners, Fisher Asset Management, and Voleon Capital 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 Select Equity Group allocated the biggest weight to First Republic Bank (NYSE:FRC), around 3.17% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, dishing out 1.59 percent of its 13F equity portfolio to FRC.
Consequently, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, established the largest position in First Republic Bank (NYSE:FRC). Millennium Management had $11 million invested in the company at the end of the quarter. Principal Global Investors’s Columbus Circle Investors also made a $8.8 million investment in the stock during the quarter. The other funds with brand new FRC positions are Ray Dalio’s Bridgewater Associates, D. E. Shaw’s D E Shaw, and James Dondero’s Highland Capital Management.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as First Republic Bank (NYSE:FRC) but similarly valued. These stocks are Imperial Oil Limited (NYSE:IMO), 0, Seattle Genetics, Inc. (NASDAQ:SGEN), and Franco-Nevada Corporation (NYSE:FNV). This group of stocks’ market valuations are similar to FRC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IMO | 10 | 35415 | -2 |
| TCOM | 31 | 1031564 | -8 |
| SGEN | 36 | 6196536 | 7 |
| FNV | 24 | 796996 | 1 |
| Average | 25.25 | 2015128 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $2015 million. That figure was $939 million in FRC’s case. Seattle Genetics, Inc. (NASDAQ:SGEN) is the most popular stock in this table. On the other hand Imperial Oil Limited (NYSE:IMO) is the least popular one with only 10 bullish hedge fund positions. First Republic Bank (NYSE:FRC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately FRC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FRC were disappointed as the stock returned -29.3% 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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.
