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Hedge Funds Have Never Been This Bullish On First Republic Bank (FRC)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding First Republic Bank (NYSE:FRC) and determine whether hedge funds had an edge regarding this stock.

First Republic Bank (NYSE:FRC) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. FRC investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 28 hedge funds in our database with FRC holdings at the end of March. Our calculations also showed that FRC 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).

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

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Blair Levinsky of Waratah Capital Advisors

Blair Levinsky of Waratah Capital Advisors

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. 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. 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. Keeping this in mind let’s take a glance at the fresh hedge fund action surrounding First Republic Bank (NYSE:FRC).

What have hedge funds been doing with First Republic Bank (NYSE:FRC)?

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 32% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in FRC a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in First Republic Bank (NYSE:FRC) was held by Select Equity Group, which reported holding $526.2 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $290.1 million position. Other investors bullish on the company included Citadel Investment Group, Junto Capital Management, and Osterweis Capital Management. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to First Republic Bank (NYSE:FRC), around 3.02% of its 13F portfolio. Junto Capital Management is also relatively very bullish on the stock, designating 2.53 percent of its 13F equity portfolio to FRC.

With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. Junto Capital Management, managed by James Parsons, assembled the most outsized position in First Republic Bank (NYSE:FRC). Junto Capital Management had $59.3 million invested in the company at the end of the quarter. Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors also made a $6.3 million investment in the stock during the quarter. The other funds with brand new FRC positions are Daniel Johnson’s Gillson Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Seth Cogswell’s Running Oak Capital.

Let’s now review hedge fund activity in other stocks similar to First Republic Bank (NYSE:FRC). These stocks are Paycom Software Inc (NYSE:PAYC), Yum China Holdings, Inc. (NYSE:YUMC), DISH Network Corp. (NASDAQ:DISH), Chewy, Inc. (NYSE:CHWY), Delta Air Lines, Inc. (NYSE:DAL), Fortis Inc. (NYSE:FTS), and PG&E Corporation (NYSE:PCG). This group of stocks’ market caps match FRC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PAYC 36 503943 6
YUMC 35 839761 11
DISH 54 1703499 10
CHWY 44 569875 8
DAL 39 864778 -14
FTS 8 379313 -7
PCG 92 4871702 44
Average 44 1390410 8.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $1390 million. That figure was $1193 million in FRC’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 8 bullish hedge fund positions. First Republic Bank (NYSE:FRC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FRC is 57.3. 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 negative signal and 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately FRC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FRC investors were disappointed as the stock returned 6.7% since Q2 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.