Were Hedge Funds Right About Piling Into First American Financial Corp (FAF)?

Reymerlyn Martin
·6 min read

In this article you are going to find out whether hedge funds think First American Financial Corp (NYSE:FAF) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is First American Financial Corp (NYSE:FAF) a buy here? The smart money was buying. The number of long hedge fund positions rose by 4 recently. First American Financial Corp (NYSE:FAF) was in 44 hedge funds' portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FAF 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). There were 40 hedge funds in our database with FAF positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ian Wace Marshall Wace
Ian Wace Marshall Wace

Ian Wace of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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. Keeping this in mind we're going to analyze the key hedge fund action encompassing First American Financial Corp (NYSE:FAF).

Hedge fund activity in First American Financial Corp (NYSE:FAF)

At the end of June, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FAF over the last 20 quarters. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, John W. Rogers's Ariel Investments has the number one position in First American Financial Corp (NYSE:FAF), worth close to $151.9 million, comprising 2.3% of its total 13F portfolio. Sitting at the No. 2 spot is Anthony Bozza of Lakewood Capital Management, with a $63.2 million position; the fund has 2.7% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish consist of Ken Fisher's Fisher Asset Management, Cliff Asness's AQR Capital Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 3.49% of its 13F portfolio. Clough Capital Partners is also relatively very bullish on the stock, setting aside 3.12 percent of its 13F equity portfolio to FAF.

Consequently, key money managers were leading the bulls' herd. Jericho Capital Asset Management, managed by Josh Resnick, initiated the most outsized position in First American Financial Corp (NYSE:FAF). Jericho Capital Asset Management had $37.7 million invested in the company at the end of the quarter. Charles Clough's Clough Capital Partners also initiated a $31.9 million position during the quarter. The other funds with brand new FAF positions are Spencer M. Waxman's Shannon River Fund Management, Ken Grossman and Glen Schneider's SG Capital Management, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's check out hedge fund activity in other stocks similar to First American Financial Corp (NYSE:FAF). These stocks are Jones Lang LaSalle Inc (NYSE:JLL), Woori Financial Group Inc. (NYSE:WF), Corelogic Inc (NYSE:CLGX), Columbia Sportswear Company (NASDAQ:COLM), United Therapeutics Corporation (NASDAQ:UTHR), Levi Strauss & Co. (NYSE:LEVI), and FLIR Systems, Inc. (NASDAQ:FLIR). This group of stocks' market caps are closest to FAF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JLL,23,676141,-3 WF,5,3508,2 CLGX,35,887468,4 COLM,17,36331,2 UTHR,41,1344322,10 LEVI,16,33046,5 FLIR,38,292419,4 Average,25,467605,3.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $468 million. That figure was $686 million in FAF's case. United Therapeutics Corporation (NASDAQ:UTHR) is the most popular stock in this table. On the other hand Woori Financial Group Inc. (NYSE:WF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks First American Financial Corp (NYSE:FAF) is more popular among hedge funds. Our overall hedge fund sentiment score for FAF is 89. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Unfortunately FAF wasn't nearly as popular as these 10 stocks and hedge funds that were betting on FAF were disappointed as the stock returned 1.7% since the end of the second quarter (through 10/23) 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.

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