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Hedge Fund Sentiment Is Stagnant On First Merchants Corporation (FRME)

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Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

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 10 hedge funds' portfolios at the end of September. At the end of this article we will also compare FRME to other stocks including Myriad Genetics, Inc. (NASDAQ:MYGN), Flagstar Bancorp Inc (NYSE:FBC), and Deluxe Corporation (NYSE:DLX) to get a better sense of its popularity.

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

To the average investor there are several signals shareholders have at their disposal to analyze stocks. Two of the most innovative signals are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the best picks of the elite fund managers can beat their index-focused peers by a superb amount (see the details here).

[caption id="attachment_26073" align="alignnone" width="600"]

RENAISSANCE TECHNOLOGIES
RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's review the new hedge fund action encompassing First Merchants Corporation (NASDAQ:FRME).

Hedge fund activity in First Merchants Corporation (NASDAQ:FRME)

Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. By comparison, 13 hedge funds held shares or bullish call options in FRME a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Is FRME A Good Stock To Buy?
Is FRME A Good Stock To Buy?

More specifically, Cardinal Capital was the largest shareholder of First Merchants Corporation (NASDAQ:FRME), with a stake worth $51.8 million reported as of the end of September. Trailing Cardinal Capital was Renaissance Technologies, which amassed a stake valued at $28.6 million. Millennium Management, AQR Capital Management, and Fisher Asset Management 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 Cardinal Capital allocated the biggest weight to First Merchants Corporation (NASDAQ:FRME), around 1.71% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, dishing out 0.25 percent of its 13F equity portfolio to FRME.

Seeing as First Merchants Corporation (NASDAQ:FRME) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few funds that decided to sell off their entire stakes in the third quarter. At the top of the heap, Paul Magidson, Jonathan Cohen. And Ostrom Enders's Castine Capital Management dumped the biggest stake of all the hedgies followed by Insider Monkey, valued at an estimated $8.1 million in stock, and Donald Sussman's Paloma Partners was right behind this move, as the fund cut about $2.9 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as First Merchants Corporation (NASDAQ:FRME) but similarly valued. These stocks are Myriad Genetics, Inc. (NASDAQ:MYGN), Flagstar Bancorp Inc (NYSE:FBC), Deluxe Corporation (NYSE:DLX), and Apergy Corporation (NYSE:APY). This group of stocks' market valuations match FRME's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MYGN,13,240082,-2 FBC,15,71841,0 DLX,23,134255,4 APY,16,87946,1 Average,16.75,133531,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $134 million. That figure was $92 million in FRME's case. Deluxe Corporation (NYSE:DLX) is the most popular stock in this table. On the other hand Myriad Genetics, Inc. (NASDAQ:MYGN) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks First Merchants Corporation (NASDAQ:FRME) is even less popular than MYGN. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on FRME, though not to the same extent, as the stock returned 7.6% during the fourth quarter (through 11/30) and outperformed the market as well.

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

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