Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because of their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market-beating returns. For example, the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Franklin Financial Network Inc (NYSE:FSB).
Franklin Financial Network Inc (NYSE:FSB) shareholders have witnessed a decrease in enthusiasm from smart money recently. Our calculations also showed that FSB isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world, there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best-performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example, Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind, we’re going to take a look at the key hedge fund action regarding Franklin Financial Network Inc (NYSE:FSB).
How are hedge funds trading Franklin Financial Network Inc (NYSE:FSB)?
At Q3’s end, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FSB over the last 17 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Franklin Financial Network Inc (NYSE:FSB) was held by Royce & Associates, which reported holding $10.7 million worth of stock at the end of September. It was followed by Millennium Management with a $2.3 million position. The only other hedge fund that is bullish on the company was Renaissance Technologies.
We view hedge fund activity in the stock unfavorable, but in this case, there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically, a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified FSB as a viable investment and initiated a position in the stock.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Franklin Financial Network Inc (NYSE:FSB) but similarly valued. We will take a look at The Manitowoc Company, Inc. (NYSE:MTW), Cellectis SA (NASDAQ:CLLS), Syros Pharmaceuticals, Inc. (NASDAQ:SYRS), and Scorpio Bulkers Inc (NYSE:SALT). This group of stocks’ market valuations are similar to FSB’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MTW | 15 | 80014 | 2 |
| CLLS | 8 | 20654 | -3 |
| SYRS | 9 | 89221 | -4 |
| SALT | 11 | 26198 | 1 |
| Average | 10.75 | 54022 | -1 |
View the table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $14 million in FSB’s case. The Manitowoc Company, Inc. (NYSE:MTW) is the most popular stock in this table. On the other hand, Cellectis SA (NASDAQ:CLLS) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Franklin Financial Network Inc (NYSE:FSB) is even less popular than CLLS. Hedge funds clearly dropped the ball on FSB as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on FSB as the stock returned 13.2% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
