“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on First American Financial Corp (NYSE:FAF) in order to identify whether reputable and successful top money managers continue to believe in its potential.
First American Financial Corp (NYSE:FAF) investors should be aware of a decrease in support from the world’s most elite money managers of late. FAF was in 30 hedge funds’ portfolios at the end of the first quarter of 2019. There were 33 hedge funds in our database with FAF positions at the end of the previous quarter. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Let’s check out the latest hedge fund action encompassing First American Financial Corp (NYSE:FAF).
How have hedgies been trading First American Financial Corp (NYSE:FAF)?
At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the fourth quarter of 2018. On the other hand, there were a total of 31 hedge funds with a bullish position 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.
When looking at the institutional investors followed by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the largest position in First American Financial Corp (NYSE:FAF). Ariel Investments has a $217.2 million position in the stock, comprising 2.7% of its 13F portfolio. The second largest stake is held by AQR Capital Management, led by Cliff Asness, holding a $94.1 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other professional money managers that are bullish include Ken Griffin’s Citadel Investment Group, Ken Fisher’s Fisher Asset Management and Jim Simons’s Renaissance Technologies.
Since First American Financial Corp (NYSE:FAF) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds that decided to sell off their entire stakes heading into Q3. Interestingly, Matthew Tewksbury’s Stevens Capital Management sold off the biggest stake of the 700 funds watched by Insider Monkey, valued at close to $0.8 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dropped about $0.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q3.
Let’s also examine hedge fund activity in other stocks similar to First American Financial Corp (NYSE:FAF). These stocks are HUYA Inc. (NYSE:HUYA), Brookfield Renewable Partners L.P. (NYSE:BEP), Elastic N.V. (NYSE:ESTC), and Alkermes Plc (NASDAQ:ALKS). This group of stocks’ market valuations resemble FAF’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HUYA | 21 | 307858 | 5 |
| BEP | 3 | 2816 | 0 |
| ESTC | 18 | 161603 | -3 |
| ALKS | 22 | 309347 | 3 |
| Average | 16 | 195406 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $195 million. That figure was $679 million in FAF’s case. Alkermes Plc (NASDAQ:ALKS) is the most popular stock in this table. On the other hand Brookfield Renewable Partners L.P. (NYSE:BEP) is the least popular one with only 3 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on FAF, though not to the same extent, as the stock returned 0.6% during the same period and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
