Should You Buy First Defiance Financial (FDEF)?

Reputable billionaire investors such as Nelson Peltz and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Hedge fund interest in First Defiance Financial (NASDAQ:FDEF) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Blue Nile Inc (NASDAQ:NILE), Franklin Financial Network Inc (NYSE:FSB), and Conyers Park Acquisition Corp. (NASDAQ:CPAA) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

With all of this in mind, we’re going to take a gander at the fresh action regarding First Defiance Financial (NASDAQ:FDEF).

How are hedge funds trading First Defiance Financial (NASDAQ:FDEF)?

At Q3’s end, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, unchanged from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in FDEF at the beginning of this year. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies, one of the largest hedge funds in the world, holds the number one position in First Defiance Financial (NASDAQ:FDEF). According to its latest 13F filing, the fund has an $11.9 million position in the stock. Coming in second is Cliff Asness of AQR Capital Management, with a $4 million position. Remaining hedge funds and institutional investors that hold long positions contain Israel Englander’s Millennium Management, John Overdeck and David Siegel’s Two Sigma Advisors and Gregg J. Powers’ Private Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Balyasny Asset Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Arrowstreet Capital).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as First Defiance Financial (NASDAQ:FDEF) but similarly valued. We will take a look at Blue Nile Inc (NASDAQ:NILE), Franklin Financial Network Inc (NYSE:FSB), Conyers Park Acquisition Corp. (NASDAQ:CPAA), and Navigator Holdings Ltd (NYSE:NVGS). This group of stocks’ market values resemble FDEF’s market value.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $125 million. That figure was $21 million in FDEF’s case. Conyers Park Acquisition Corp. (NASDAQ:CPAA) is the most popular stock in this table. On the other hand Franklin Financial Network Inc (NYSE:FSB) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks First Defiance Financial (NASDAQ:FDEF) is even less popular than FSB. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None