How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding First Commonwealth Financial (NYSE:FCF) and determine whether hedge funds had an edge regarding this stock.
Is First Commonwealth Financial (NYSE:FCF) a good stock to buy now? Hedge funds were getting less optimistic. The number of long hedge fund bets shrunk by 4 recently. Our calculations also showed that FCF isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). FCF was in 11 hedge funds' portfolios at the end of March. There were 15 hedge funds in our database with FCF holdings at the end of the previous quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
[caption id="attachment_845793" align="aligncenter" width="400"] Peter Rathjens of Arrowstreet Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a gander at the fresh hedge fund action encompassing First Commonwealth Financial (NYSE:FCF).
What have hedge funds been doing with First Commonwealth Financial (NYSE:FCF)?
Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FCF over the last 18 quarters. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, holds the most valuable position in First Commonwealth Financial (NYSE:FCF). Renaissance Technologies has a $11.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by Millennium Management, managed by Israel Englander, which holds a $3.3 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other peers that are bullish encompass Ken Griffin's Citadel Investment Group, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Peter Muller's PDT Partners. In terms of the portfolio weights assigned to each position PDT Partners allocated the biggest weight to First Commonwealth Financial (NYSE:FCF), around 0.09% of its 13F portfolio. ZWEIG DIMENNA PARTNERS is also relatively very bullish on the stock, designating 0.05 percent of its 13F equity portfolio to FCF.
Seeing as First Commonwealth Financial (NYSE:FCF) has faced a decline in interest from the smart money, we can see that there is a sect of hedge funds that slashed their positions entirely in the first quarter. At the top of the heap, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors sold off the largest stake of the "upper crust" of funds followed by Insider Monkey, comprising about $0.3 million in stock. Donald Sussman's fund, Paloma Partners, also sold off its stock, about $0.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 4 funds in the first quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as First Commonwealth Financial (NYSE:FCF) but similarly valued. These stocks are Enviva Partners, LP (NYSE:EVA), TiVo Corporation (NASDAQ:TIVO), Brookline Bancorp, Inc. (NASDAQ:BRKL), and Perficient, Inc. (NASDAQ:PRFT). All of these stocks' market caps are similar to FCF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EVA,5,86460,0 TIVO,20,72022,-6 BRKL,8,44967,-3 PRFT,21,58816,-2 Average,13.5,65566,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $22 million in FCF's case. Perficient, Inc. (NASDAQ:PRFT) is the most popular stock in this table. On the other hand Enviva Partners, LP (NYSE:EVA) is the least popular one with only 5 bullish hedge fund positions. First Commonwealth Financial (NYSE:FCF) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately FCF wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FCF investors were disappointed as the stock returned -8.2% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.