Hedge Funds Are Nibbling On Texas Capital Bancshares Inc (TCBI)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 Texas Capital Bancshares Inc (NASDAQ:TCBI) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Texas Capital Bancshares Inc (NASDAQ:TCBI) a cheap investment right now? Prominent investors were taking an optimistic view. The number of bullish hedge fund positions inched up by 2 in recent months. Texas Capital Bancshares Inc (NASDAQ:TCBI) was in 21 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 26. Our calculations also showed that TCBI isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 19 hedge funds in our database with TCBI positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Matthew Lindenbaum Basswood Capital

Matthew Lindenbaum of Basswood Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now we’re going to view the recent hedge fund action encompassing Texas Capital Bancshares Inc (NASDAQ:TCBI).

Hedge fund activity in Texas Capital Bancshares Inc (NASDAQ:TCBI)

Heading into the third quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in TCBI a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Texas Capital Bancshares Inc (NASDAQ:TCBI) was held by D E Shaw, which reported holding $24.4 million worth of stock at the end of September. It was followed by Basswood Capital with a $14.8 million position. Other investors bullish on the company included Azora Capital, Renaissance Technologies, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Azora Capital allocated the biggest weight to Texas Capital Bancshares Inc (NASDAQ:TCBI), around 1.96% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, earmarking 1.42 percent of its 13F equity portfolio to TCBI.

As one would reasonably expect, key hedge funds have been driving this bullishness. Basswood Capital, managed by Matthew Lindenbaum, assembled the most outsized position in Texas Capital Bancshares Inc (NASDAQ:TCBI). Basswood Capital had $14.8 million invested in the company at the end of the quarter. Ravi Chopra’s Azora Capital also made a $12 million investment in the stock during the quarter. The other funds with new positions in the stock are Anand Parekh’s Alyeska Investment Group, Dmitry Balyasny’s Balyasny Asset Management, and Steven Clark’s Omni Partners.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Texas Capital Bancshares Inc (NASDAQ:TCBI) but similarly valued. These stocks are Gibraltar Industries Inc (NASDAQ:ROCK), Trustmark Corp (NASDAQ:TRMK), MaxLinear, Inc. (NYSE:MXL), Vector Group Ltd (NYSE:VGR), Cactus, Inc. (NYSE:WHD), WestAmerica Bancorp. (NASDAQ:WABC), and Lions Gate Entertainment Corporation (NYSE:LGF-A). This group of stocks’ market values resemble TCBI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ROCK 14 111597 -5
TRMK 17 26322 4
MXL 15 58612 2
VGR 18 125141 2
WHD 22 134050 4
WABC 12 29747 4
LGF-A 23 260345 0
Average 17.3 106545 1.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.3 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $111 million in TCBI’s case. Lions Gate Entertainment Corporation (NYSE:LGF-A) is the most popular stock in this table. On the other hand WestAmerica Bancorp. (NASDAQ:WABC) is the least popular one with only 12 bullish hedge fund positions. Texas Capital Bancshares Inc (NASDAQ:TCBI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TCBI is 72.1. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately TCBI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TCBI were disappointed as the stock returned 0.8% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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