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First Republic Bank (FRC): Are Hedge Funds Right About This Stock?

Reymerlyn Martin

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.

First Republic Bank (NYSE:FRC) investors should be aware of an increase in enthusiasm from smart money lately. FRC was in 23 hedge funds' portfolios at the end of the third quarter of 2018. There were 17 hedge funds in our database with FRC holdings at the end of the previous quarter. Our calculations also showed that FRC isn't among the 30 most popular stocks among hedge funds.

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.

Dmitry Balyasny

Let's take a look at the fresh hedge fund action regarding First Republic Bank (NYSE:FRC).

Hedge fund activity in First Republic Bank (NYSE:FRC)

At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 35% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FRC over the last 13 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

FRC_dec2018

More specifically, Select Equity Group was the largest shareholder of First Republic Bank (NYSE:FRC), with a stake worth $274.4 million reported as of the end of September. Trailing Select Equity Group was Diamond Hill Capital, which amassed a stake valued at $264.6 million. LMR Partners, Balyasny Asset Management, and Laurion Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, specific money managers were leading the bulls' herd. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, assembled the most valuable position in First Republic Bank (NYSE:FRC). LMR Partners had $39.1 million invested in the company at the end of the quarter. Daniel Lascano's Lomas Capital Management also made a $8.8 million investment in the stock during the quarter. The following funds were also among the new FRC investors: Glenn Russell Dubin's Highbridge Capital Management, Ken Griffin's Citadel Investment Group, and Michael Platt and William Reeves's BlueCrest Capital Mgmt..

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as First Republic Bank (NYSE:FRC) but similarly valued. These stocks are Fortinet Inc (NASDAQ:FTNT), Shopify Inc (NYSE:SHOP), Comerica Incorporated (NYSE:CMA), and Discovery, Inc. (NASDAQ:DISCK). This group of stocks' market caps match FRC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FTNT,28,1046841,2 SHOP,28,1260759,3 CMA,37,927907,-6 DISCK,34,1260560,4 Average,31.75,1124017,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $1.12 billion. That figure was $724 million in FRC's case. Comerica Incorporated (NYSE:CMA) is the most popular stock in this table. On the other hand Fortinet Inc (NASDAQ:FTNT) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks First Republic Bank (NYSE:FRC) is even less popular than FTNT. 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. This article was originally published at Insider Monkey.

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