Should You Avoid BankUnited (BKU)?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards BankUnited (NYSE:BKU), and what that likely means for the prospects of the company and its stock.

Is BankUnited (NYSE:BKU) a buy, sell, or hold? Prominent investors are reducing their bets on the stock. The number of long hedge fund positions went down by 2 in recent months. 15 hedge funds that we track were long the stock on September 30. There were 17 hedge funds in our database with BKU holdings at the end of the previous quarter. At the end of this article we will also compare BKU to other stocks including Spirit Airlines Incorporated (NASDAQ:SAVE), New Residential Investment Corp (NYSE:NRZ), and Energizer Holdings, Inc. (NYSE:ENR) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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How are hedge funds trading BankUnited (NYSE:BKU)?

At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a 12% dip from the second quarter of 2016. By comparison, 17 hedge funds held shares or bullish call options in BKU heading into this year, as hedge fund ownership of the stock remains volatile within a narrow range. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Ric Dillon’s Diamond Hill Capital has the most valuable position in BankUnited (NYSE:BKU), worth close to $184.8 million, corresponding to 1.1% of its total 13F portfolio. The second largest stake is held by Millennium Management, founded by Israel Englander, holding a $79.5 million position. Remaining members of the smart money that are bullish consist of Ken Griffin’s Citadel Investment Group, Anand Parekh’s Alyeska Investment Group, and Jim Simons’ Renaissance Technologies. 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.

Now that we’ve mentioned the most bullish investors, let’s also take a look at some funds that said goodbye to their entire stakes in the stock during the third quarter. It’s worth mentioning that Daniel Lascano’s Lomas Capital Management said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, comprising close to $7.8 million in stock. Anton Schutz’s fund, Mendon Capital Advisors, also said goodbye to its stock, about $7.7 million worth.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as BankUnited (NYSE:BKU) but similarly valued. These stocks are Spirit Airlines Incorporated (NASDAQ:SAVE), New Residential Investment Corp (NYSE:NRZ), Energizer Holdings, Inc. (NYSE:ENR), and Sensient Technologies Corporation (NYSE:SXT). All of these stocks’ market caps resemble BKU’s market cap.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $252 million. That figure was $332 million in BKU’s case. Spirit Airlines Incorporated (NASDAQ:SAVE) is the most popular stock in this table. On the other hand Sensient Technologies Corporation (NYSE:SXT) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks BankUnited (NYSE:BKU) is even less popular than SXT. 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