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Do Hedge Funds Love First Merchants Corporation (FRME)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether First Merchants Corporation (NASDAQ:FRME) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

First Merchants Corporation (NASDAQ:FRME) was in 12 hedge funds’ portfolios at the end of the fourth quarter of 2019. FRME has experienced an increase in enthusiasm from smart money recently. There were 10 hedge funds in our database with FRME holdings at the end of the previous quarter. Our calculations also showed that FRME isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 41 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.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s check out the fresh hedge fund action regarding First Merchants Corporation (NASDAQ:FRME).

What does smart money think about First Merchants Corporation (NASDAQ:FRME)?

Heading into the first quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the third quarter of 2019. On the other hand, there were a total of 13 hedge funds with a bullish position in FRME a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Amy Minella’s Cardinal Capital has the number one position in First Merchants Corporation (NASDAQ:FRME), worth close to $64.9 million, amounting to 2% of its total 13F portfolio. On Cardinal Capital’s heels is Renaissance Technologies, holding a $28.6 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other peers with similar optimism consist of Israel Englander’s Millennium Management, Ken Griffin’s Citadel Investment Group and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Cardinal Capital allocated the biggest weight to First Merchants Corporation (NASDAQ:FRME), around 1.98% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, dishing out 0.26 percent of its 13F equity portfolio to FRME.

Consequently, key hedge funds have jumped into First Merchants Corporation (NASDAQ:FRME) headfirst. ExodusPoint Capital, managed by Michael Gelband, established the most outsized position in First Merchants Corporation (NASDAQ:FRME). ExodusPoint Capital had $0.5 million invested in the company at the end of the quarter. Mika Toikka’s AlphaCrest Capital Management also initiated a $0.4 million position during the quarter. The only other fund with a new position in the stock is Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as First Merchants Corporation (NASDAQ:FRME) but similarly valued. These stocks are Grupo Financiero Galicia S.A. (NASDAQ:GGAL), Banco Macro SA (NYSE:BMA), Colony Capital Inc (NYSE:CLNY), and Rogers Corporation (NYSE:ROG). All of these stocks’ market caps are similar to FRME’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GGAL 8 29637 0
BMA 7 115618 -5
CLNY 25 353690 3
ROG 21 63127 0
Average 15.25 140518 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $111 million in FRME’s case. Colony Capital Inc (NYSE:CLNY) is the most popular stock in this table. On the other hand Banco Macro SA (NYSE:BMA) is the least popular one with only 7 bullish hedge fund positions. First Merchants Corporation (NASDAQ:FRME) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately FRME wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FRME investors were disappointed as the stock returned -43.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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