Here’s What Hedge Funds Think About First Republic Bank (FRC)

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of First Republic Bank (NYSE:FRC).

Is First Republic Bank (NYSE:FRC) a buy here? Money managers are becoming more confident. The number of long hedge fund positions rose by 3 in recent months. Our calculations also showed that frc isn’t among the 30 most popular stocks among hedge funds. FRC was in 18 hedge funds’ portfolios at the end of the first quarter of 2019. There were 15 hedge funds in our database with FRC positions at the end of the previous quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Dmitry Balyasny

We’re going to check out the new hedge fund action regarding First Republic Bank (NYSE:FRC).

How are hedge funds trading First Republic Bank (NYSE:FRC)?

Heading into the second quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in FRC over the last 15 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with FRC Positions

Among these funds, Select Equity Group held the most valuable stake in First Republic Bank (NYSE:FRC), which was worth $324.8 million at the end of the first quarter. On the second spot was Diamond Hill Capital which amassed $264.3 million worth of shares. Moreover, Balyasny Asset Management, GLG Partners, and Fisher Asset Management were also bullish on First Republic Bank (NYSE:FRC), allocating a large percentage of their portfolios to this stock.

Consequently, key hedge funds have been driving this bullishness. PEAK6 Capital Management, managed by Matthew Hulsizer, established the most outsized position in First Republic Bank (NYSE:FRC). PEAK6 Capital Management had $3 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $1.4 million position during the quarter. The other funds with new positions in the stock are Joel Greenblatt’s Gotham Asset Management, Ian Simm’s Impax Asset Management, and Claes Fornell’s CSat Investment Advisory.

Let’s now review hedge fund activity in other stocks similar to First Republic Bank (NYSE:FRC). These stocks are AmerisourceBergen Corporation (NYSE:ABC), Deutsche Bank Aktiengesellschaft (NYSE:DB), W.W. Grainger, Inc. (NYSE:GWW), and Korea Electric Power Corporation (NYSE:KEP). This group of stocks’ market caps are similar to FRC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ABC 28 677582 -6
DB 13 1074334 -1
GWW 29 349124 6
KEP 10 37936 1
Average 20 534744 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $535 million. That figure was $684 million in FRC’s case. W.W. Grainger, Inc. (NYSE:GWW) is the most popular stock in this table. On the other hand Korea Electric Power Corporation (NYSE:KEP) is the least popular one with only 10 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. 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately FRC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FRC investors were disappointed as the stock returned -2.3% 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 13 of these stocks already outperformed the market so far in Q2.

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