"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 Merchants Corporation (NASDAQ:FRME).
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 13 hedge funds' portfolios at the end of December. At the end of this article we will also compare FRME to other stocks including Stitch Fix, Inc. (NASDAQ:SFIX), Artisan Partners Asset Management Inc (NYSE:APAM), and Appian Corporation (NASDAQ:APPN) to get a better sense of its popularity.
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.
Let's take a look at the recent hedge fund action surrounding First Merchants Corporation (NASDAQ:FRME).
Hedge fund activity in First Merchants Corporation (NASDAQ:FRME)
At Q4's end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in FRME over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in First Merchants Corporation (NASDAQ:FRME) was held by Cardinal Capital, which reported holding $64.4 million worth of stock at the end of December. It was followed by Renaissance Technologies with a $27.8 million position. Other investors bullish on the company included Castine Capital Management, Millennium Management, and Marshall Wace LLP.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's check out hedge fund activity in other stocks similar to First Merchants Corporation (NASDAQ:FRME). These stocks are Stitch Fix, Inc. (NASDAQ:SFIX), Artisan Partners Asset Management Inc (NYSE:APAM), Appian Corporation (NASDAQ:APPN), and United Community Banks Inc (NASDAQ:UCBI). 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 SFIX,20,132132,-1 APAM,16,118757,3 APPN,9,246766,1 UCBI,14,70664,0 Average,14.75,142080,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $142 million. That figure was $122 million in FRME's case. Stitch Fix, Inc. (NASDAQ:SFIX) is the most popular stock in this table. On the other hand Appian Corporation (NASDAQ:APPN) is the least popular one with only 9 bullish hedge fund positions. First Merchants Corporation (NASDAQ:FRME) 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 FRME wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); FRME investors were disappointed as the stock returned 10.4% 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.