Were Hedge Funds Right About First American Financial Corp (FAF)?

Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards First American Financial Corp (NYSE:FAF).

First American Financial Corp (NYSE:FAF) was in 31 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 44. FAF has experienced a decrease in hedge fund sentiment lately. There were 32 hedge funds in our database with FAF positions at the end of the first quarter. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 79 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.

Parag Vora of HG Vora Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let’s analyze the latest hedge fund action regarding First American Financial Corp (NYSE:FAF).

Do Hedge Funds Think FAF Is A Good Stock To Buy Now?

At Q2’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the first quarter of 2020. By comparison, 44 hedge funds held shares or bullish call options in FAF a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, HG Vora Capital Management held the most valuable stake in First American Financial Corp (NYSE:FAF), which was worth $389.7 million at the end of the second quarter. On the second spot was Ariel Investments which amassed $337.3 million worth of shares. Lakewood Capital Management, D E Shaw, and Clough Capital Partners 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 HG Vora Capital Management allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 17.58% of its 13F portfolio. Lakewood Capital Management is also relatively very bullish on the stock, dishing out 3.41 percent of its 13F equity portfolio to FAF.

Since First American Financial Corp (NYSE:FAF) has faced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedgies who sold off their positions entirely in the second quarter. Interestingly, David Rodriguez-Fraile’s BlueMar Capital Management sold off the largest position of the 750 funds monitored by Insider Monkey, valued at an estimated $6.1 million in stock, and Mark Coe’s Intrinsic Edge Capital was right behind this move, as the fund dumped about $4.2 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds in the second quarter.

Let’s go over hedge fund activity in other stocks similar to First American Financial Corp (NYSE:FAF). These stocks are ANGI Inc (NASDAQ:ANGI), Stifel Financial Corp. (NYSE:SF), Marriott Vacations Worldwide Corporation (NYSE:VAC), Brixmor Property Group Inc (NYSE:BRX), Petco Health and Wellness Company, Inc. (NASDAQ:WOOF), Wyndham Hotels & Resorts, Inc. (NYSE:WH), and First Industrial Realty Trust, Inc. (NYSE:FR). This group of stocks’ market caps match FAF’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $438 million. That figure was $1225 million in FAF’s case. Marriott Vacations Worldwide Corporation (NYSE:VAC) is the most popular stock in this table. On the other hand Brixmor Property Group Inc (NYSE:BRX) is the least popular one with only 21 bullish hedge fund positions. First American Financial Corp (NYSE:FAF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FAF is 60.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and still beat the market by 3.1 percentage points. Hedge funds were also right about betting on FAF as the stock returned 21.8% since the end of Q2 (through 11/5) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.