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Were These Hedge Funds Right About Betting On First Republic Bank (FRC)?

Asma UL Husna
·6 min read

In this article we will take a look at whether hedge funds think First Republic Bank (NYSE:FRC) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

First Republic Bank (NYSE:FRC) was in 37 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. FRC shareholders have witnessed an increase in hedge fund interest of late. There were 28 hedge funds in our database with FRC positions at the end of the first quarter. Our calculations also showed that FRC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Blair Levinsky of Waratah Capital Advisors
Blair Levinsky of Waratah Capital Advisors

Blair Levinsky of Waratah Capital Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's go over the latest hedge fund action regarding First Republic Bank (NYSE:FRC).

How have hedgies been trading First Republic Bank (NYSE:FRC)?

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 32% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in FRC a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in First Republic Bank (NYSE:FRC) was held by Select Equity Group, which reported holding $526.2 million worth of stock at the end of June. It was followed by Diamond Hill Capital with a $290.1 million position. Other investors bullish on the company included Citadel Investment Group, Junto Capital Management, and Osterweis Capital Management. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to First Republic Bank (NYSE:FRC), around 3.02% of its 13F portfolio. Junto Capital Management is also relatively very bullish on the stock, dishing out 2.53 percent of its 13F equity portfolio to FRC.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Junto Capital Management, managed by James Parsons, assembled the biggest position in First Republic Bank (NYSE:FRC). Junto Capital Management had $59.3 million invested in the company at the end of the quarter. Brad Dunkley and Blair Levinsky's Waratah Capital Advisors also made a $6.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Daniel Johnson's Gillson Capital, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Seth Cogswell's Running Oak Capital.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as First Republic Bank (NYSE:FRC) but similarly valued. We will take a look at Paycom Software Inc (NYSE:PAYC), Yum China Holdings, Inc. (NYSE:YUMC), DISH Network Corp. (NASDAQ:DISH), Chewy, Inc. (NYSE:CHWY), Delta Air Lines, Inc. (NYSE:DAL), Fortis Inc. (NYSE:FTS), and PG&E Corporation (NYSE:PCG). This group of stocks' market valuations resemble FRC's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAYC,36,503943,6 YUMC,35,839761,11 DISH,54,1703499,10 CHWY,44,569875,8 DAL,39,864778,-14 FTS,8,379313,-7 PCG,92,4871702,44 Average,44,1390410,8.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $1390 million. That figure was $1193 million in FRC's case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 8 bullish hedge fund positions. First Republic Bank (NYSE:FRC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FRC is 57.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on FRC as the stock returned 19.4% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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

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