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Hedge Funds Have Never Been This Bullish On First American Financial Corp (FAF)

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

Is First American Financial Corp (NYSE:FAF) a great investment right now? The best stock pickers are getting more optimistic. The number of bullish hedge fund bets rose by 4 recently. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). FAF was in 42 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 38 hedge funds in our database with FAF positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

To most investors, hedge funds are seen as worthless, old investment tools of the past. While there are more than 8000 funds in operation at present, We hone in on the moguls of this group, about 850 funds. It is estimated that this group of investors direct bulk of the smart money’s total capital, and by keeping track of their finest equity investments, Insider Monkey has figured out a number of investment strategies that have historically defeated the broader indices. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

John Rogers Ariel Investments

John Rogers of Ariel Investments

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to take a glance at the new hedge fund action regarding First American Financial Corp (NYSE:FAF).

What have hedge funds been doing with First American Financial Corp (NYSE:FAF)?

At Q4’s end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the previous quarter. By comparison, 33 hedge funds held shares or bullish call options in FAF a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

The largest stake in First American Financial Corp (NYSE:FAF) was held by Ariel Investments, which reported holding $209.2 million worth of stock at the end of September. It was followed by AQR Capital Management with a $109.6 million position. Other investors bullish on the company included Citadel Investment Group, Carlson Capital, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Caldera Capital allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 7.03% of its 13F portfolio. 12th Street Asset Management is also relatively very bullish on the stock, earmarking 3.77 percent of its 13F equity portfolio to FAF.

Now, key money managers have been driving this bullishness. Tudor Investment Corp, managed by Paul Tudor Jones, created the biggest position in First American Financial Corp (NYSE:FAF). Tudor Investment Corp had $2.2 million invested in the company at the end of the quarter. Qing Li’s Sciencast Management also made a $1 million investment in the stock during the quarter. The other funds with new positions in the stock are Brandon Haley’s Holocene Advisors, Renee Yao’s Neo Ivy Capital, and Jinghua Yan’s TwinBeech Capital.

Let’s now take a look at 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 HD Supply Holdings Inc (NASDAQ:HDS), Moderna, Inc. (NASDAQ:MRNA), Flowserve Corporation (NYSE:FLS), and Alteryx, Inc. (NYSE:AYX). This group of stocks’ market valuations are closest to FAF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HDS 38 950035 3
MRNA 12 256023 3
FLS 26 286522 4
AYX 44 961060 0
Average 30 613410 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $613 million. That figure was $895 million in FAF’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand Moderna, Inc. (NASDAQ:MRNA) is the least popular one with only 12 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 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 12.9% in 2020 through March 9th but still beat the market by 1.9 percentage points. Hedge funds were also right about betting on FAF as the stock returned 2.6% during the first quarter (through March 9th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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