We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards First American Financial Corp (NYSE:FAF).
Is FAF a good stock to buy now? First American Financial Corp (NYSE:FAF) investors should be aware of a decrease in support from the world’s most elite money managers recently. First American Financial Corp (NYSE:FAF) was in 42 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 44. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 66 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 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this cannabis tech stock right now. We go through lists like the 15 best blue chip stocks to buy 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. With all of this in mind we’re going to take a look at the fresh hedge fund action encompassing First American Financial Corp (NYSE:FAF).
Do Hedge Funds Think FAF Is A Good Stock To Buy Now?
At Q3’s end, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2020. By comparison, 38 hedge funds held shares or bullish call options in FAF a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
More specifically, Ariel Investments was the largest shareholder of First American Financial Corp (NYSE:FAF), with a stake worth $179.7 million reported as of the end of September. Trailing Ariel Investments was Lakewood Capital Management, which amassed a stake valued at $66 million. Fisher Asset Management, Citadel Investment Group, and Clough Capital Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 4.1% of its 13F portfolio. Lakewood Capital Management is also relatively very bullish on the stock, setting aside 3.19 percent of its 13F equity portfolio to FAF.
Due to the fact that First American Financial Corp (NYSE:FAF) has experienced falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of hedgies that slashed their entire stakes last quarter. It’s worth mentioning that Josh Resnick’s Jericho Capital Asset Management said goodbye to the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth about $37.7 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund dumped about $17.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 2 funds last quarter.
Let’s now review 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 Companhia de Saneamento Basico (NYSE:SBS), Lumentum Holdings Inc (NASDAQ:LITE), Rexford Industrial Realty Inc (NYSE:REXR), TopBuild Corp (NYSE:BLD), BigCommerce Holdings, Inc. (NASDAQ:BIGC), TIM Participacoes SA (NYSE:TSU), and Flex Ltd. (NASDAQ:FLEX). This group of stocks’ market valuations are similar to FAF’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.3 hedge funds with bullish positions and the average amount invested in these stocks was $314 million. That figure was $712 million in FAF’s case. Lumentum Holdings Inc (NASDAQ:LITE) is the most popular stock in this table. On the other hand Companhia de Saneamento Basico (NYSE:SBS) is the least popular one with only 11 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 81.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Unfortunately FAF wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FAF were disappointed as the stock returned -4% since the end of the third quarter (through 12/8) 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 most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.