Were Hedge Funds Right About Dumping First Foundation Inc (FFWM) ?

“Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum,” said Clearbridge Investments in its market commentary. We aren’t sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards First Foundation Inc (NASDAQ:FFWM).

First Foundation Inc (NASDAQ:FFWM) was in 11 hedge funds’ portfolios at the end of the fourth quarter of 2018. FFWM shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 13 hedge funds in our database with FFWM positions at the end of the previous quarter. Our calculations also showed that ffwm isn’t among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Lindenbaum Basswood Capital

We’re going to review the latest hedge fund action encompassing First Foundation Inc (NASDAQ:FFWM).

What does the smart money think about First Foundation Inc (NASDAQ:FFWM)?

At the end of the fourth quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FFWM over the last 14 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with FFWM Positions

The largest stake in First Foundation Inc (NASDAQ:FFWM) was held by Mendon Capital Advisors, which reported holding $19.1 million worth of stock at the end of December. It was followed by Basswood Capital with a $16 million position. Other investors bullish on the company included Endicott Management, Azora Capital, and Royce & Associates.

Seeing as First Foundation Inc (NASDAQ:FFWM) has faced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of money managers that decided to sell off their positions entirely by the end of the third quarter. Interestingly, Cliff Asness’s AQR Capital Management said goodbye to the largest position of all the hedgies followed by Insider Monkey, valued at an estimated $0.4 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund dropped about $0.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to First Foundation Inc (NASDAQ:FFWM). We will take a look at Collegium Pharmaceutical Inc (NASDAQ:COLL), Solaris Oilfield Infrastructure, Inc. (NYSE:SOI), Karyopharm Therapeutics Inc (NASDAQ:KPTI), and Textainer Group Holdings Limited (NYSE:TGH). This group of stocks’ market caps match FFWM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
COLL 13 121954 -2
SOI 15 77167 1
KPTI 17 161898 -1
TGH 7 20962 0
Average 13 95495 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $81 million in FFWM’s case. Karyopharm Therapeutics Inc (NASDAQ:KPTI) is the most popular stock in this table. On the other hand Textainer Group Holdings Limited (NYSE:TGH) is the least popular one with only 7 bullish hedge fund positions. First Foundation Inc (NASDAQ:FFWM) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately FFWM wasn’t nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); FFWM investors were disappointed as the stock returned 6.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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