There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Carl Icahn and George Soros think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze First Merchants Corporation (NASDAQ:FRME).
First Merchants Corporation (NASDAQ:FRME) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 13 hedge funds’ portfolios at the end of the third quarter of 2018. At the end of this article we will also compare FRME to other stocks including TowneBank (NASDAQ:TOWN), Yirendai Ltd. (NYSE:YRD), and FCB Financial Holdings Inc (NYSE:FCB) to get a better sense of its popularity.
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 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 18 percentage points since May 2014 through December 3, 2018 (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.
Cliff Asness of AQR Capital Management
We’re going to take a glance at the recent hedge fund action encompassing First Merchants Corporation (NASDAQ:FRME).
Hedge fund activity in First Merchants Corporation (NASDAQ:FRME)
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, no change from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in FRME at the beginning of this year. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
More specifically, Cardinal Capital was the largest shareholder of First Merchants Corporation (NASDAQ:FRME), with a stake worth $84.7 million reported as of the end of September. Trailing Cardinal Capital was Renaissance Technologies, which amassed a stake valued at $33.1 million. Castine Capital Management, AQR Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that First Merchants Corporation (NASDAQ:FRME) has faced bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that elected to cut their full holdings in the third quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management sold off the largest stake of the “upper crust” of funds watched by Insider Monkey, worth about $0.7 million in stock, and Roger Ibbotson’s Zebra Capital Management was right behind this move, as the fund said goodbye to about $0.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to First Merchants Corporation (NASDAQ:FRME). We will take a look at TowneBank (NASDAQ:TOWN), Yirendai Ltd. (NYSE:YRD), FCB Financial Holdings Inc (NYSE:FCB), and Hamilton Lane Incorporated (NASDAQ:HLNE). This group of stocks’ market values are closest to FRME’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TOWN | 9 | 44046 | -1 |
| YRD | 5 | 15068 | -2 |
| FCB | 23 | 211302 | 5 |
| HLNE | 12 | 93069 | 5 |
| Average | 12.25 | 90871 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $153 million in FRME’s case. FCB Financial Holdings Inc (NYSE:FCB) is the most popular stock in this table. On the other hand Yirendai Ltd. (NYSE:YRD) is the least popular one with only 5 bullish hedge fund positions. First Merchants Corporation (NASDAQ:FRME) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard FCB might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
