Is First Merchants Corporation (FRME) Going to Burn These Hedge Funds?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

First Merchants Corporation (NASDAQ:FRME) shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 11 hedge funds in our database with FRME holdings at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Tronox Ltd (NYSE:TROX), Redwood Trust, Inc. (NYSE:RWT), and Ascena Retail Group Inc (NASDAQ:ASNA) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

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Now, let’s take a gander at the latest action encompassing First Merchants Corporation (NASDAQ:FRME).

How are hedge funds trading First Merchants Corporation (NASDAQ:FRME)?

At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FRME over the last 5 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies, one of the largest hedge funds in the world, has the biggest position in First Merchants Corporation (NASDAQ:FRME), worth close to $19.8 million, amounting to less than 0.1% of its total 13F portfolio. The second largest stake is held by Castine Capital Management, led by Paul Magidson, Jonathan Cohen. And Ostrom Enders, which holds a $7.7 million position; the fund has 3.8% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism include Israel Englander’s Millennium Management, Cliff Asness’s AQR Capital Management and Robert I. Usdan and Wayne K. Goldstein’s Endicott Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As industrywide interest jumped, some big names were leading the bulls’ herd. Tudor Investment Corp, led by Paul Tudor Jones, created the most valuable position in First Merchants Corporation (NASDAQ:FRME). Tudor Investment Corp had $0.3 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $0.2 million position during the quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as First Merchants Corporation (NASDAQ:FRME) but similarly valued. These stocks are Tronox Ltd (NYSE:TROX), Redwood Trust, Inc. (NYSE:RWT), Ascena Retail Group Inc (NASDAQ:ASNA), and Caleres Inc (NYSE:CAL). This group of stocks’ market caps match FRME’s market cap.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $45 million in FRME’s case. Ascena Retail Group Inc (NASDAQ:ASNA) is the most popular stock in this table. On the other hand Redwood Trust, Inc. (NYSE:RWT) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks First Merchants Corporation (NASDAQ:FRME) is as less popular than RWT. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None