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Hedge Funds Can’t Buy Enough Of First American Financial Corp (FAF)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards First American Financial Corp (NYSE:FAF) and determine whether hedge funds skillfully traded this stock.

Is First American Financial Corp (NYSE:FAF) a bargain? Investors who are in the know were taking an optimistic view. The number of bullish hedge fund positions went up by 4 lately. First American Financial Corp (NYSE:FAF) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FAF 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 40 hedge funds in our database with FAF holdings at the end of March.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Rogers Ariel Investments

John Rogers of Ariel Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let’s go over the fresh hedge fund action regarding First American Financial Corp (NYSE:FAF).

How have hedgies been trading First American Financial Corp (NYSE:FAF)?

At Q2’s end, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards FAF over the last 20 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the largest position in First American Financial Corp (NYSE:FAF). Ariel Investments has a $151.9 million position in the stock, comprising 2.3% of its 13F portfolio. The second most bullish fund manager is Lakewood Capital Management, led by Anthony Bozza, holding a $63.2 million position; 2.7% of its 13F portfolio is allocated to the stock. Remaining members of the smart money with similar optimism include Ken Fisher’s Fisher Asset Management, Cliff Asness’s AQR Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 3.49% of its 13F portfolio. Clough Capital Partners is also relatively very bullish on the stock, designating 3.12 percent of its 13F equity portfolio to FAF.

Consequently, key money managers were leading the bulls’ herd. Jericho Capital Asset Management, managed by Josh Resnick, established the largest position in First American Financial Corp (NYSE:FAF). Jericho Capital Asset Management had $37.7 million invested in the company at the end of the quarter. Charles Clough’s Clough Capital Partners also initiated a $31.9 million position during the quarter. The following funds were also among the new FAF investors: Spencer M. Waxman’s Shannon River Fund Management, Ken Grossman and Glen Schneider’s SG Capital Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as First American Financial Corp (NYSE:FAF) but similarly valued. These stocks are Jones Lang LaSalle Inc (NYSE:JLL), Woori Financial Group Inc. (NYSE:WF), Corelogic Inc (NYSE:CLGX), Columbia Sportswear Company (NASDAQ:COLM), United Therapeutics Corporation (NASDAQ:UTHR), Levi Strauss & Co. (NYSE:LEVI), and FLIR Systems, Inc. (NASDAQ:FLIR). All of these stocks’ market caps resemble FAF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JLL 23 676141 -3
WF 5 3508 2
CLGX 35 887468 4
COLM 17 36331 2
UTHR 41 1344322 10
LEVI 16 33046 5
FLIR 38 292419 4
Average 25 467605 3.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $468 million. That figure was $686 million in FAF’s case. United Therapeutics Corporation (NASDAQ:UTHR) is the most popular stock in this table. On the other hand Woori Financial Group Inc. (NYSE:WF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks First American Financial Corp (NYSE:FAF) is more popular among hedge funds. Our overall hedge fund sentiment score for FAF is 89. 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 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately FAF wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FAF were disappointed as the stock returned 9.5% since the end of the second quarter 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 most of these stocks already outperformed the market in 2020.

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