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2019 Review: Most Favored Hedge Fund Stocks vs. Cerner Corporation (CERN)

Debasis Saha

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Cerner Corporation (NASDAQ:CERN).

Cerner Corporation (NASDAQ:CERN) investors should pay attention to an increase in hedge fund sentiment lately. CERN was in 33 hedge funds' portfolios at the end of the third quarter of 2019. There were 29 hedge funds in our database with CERN positions at the end of the previous quarter. Our calculations also showed that CERN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Jeff Smith

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind we're going to take a glance at the fresh hedge fund action encompassing Cerner Corporation (NASDAQ:CERN).

How have hedgies been trading Cerner Corporation (NASDAQ:CERN)?

At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CERN over the last 17 quarters. With the smart money's capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Is CERN A Good Stock To Buy?

The largest stake in Cerner Corporation (NASDAQ:CERN) was held by Starboard Value LP, which reported holding $226.7 million worth of stock at the end of September. It was followed by Generation Investment Management with a $206.9 million position. Other investors bullish on the company included Arrowstreet Capital, Kensico Capital, and Samlyn Capital. In terms of the portfolio weights assigned to each position Starboard Value LP allocated the biggest weight to Cerner Corporation (NASDAQ:CERN), around 7.56% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, earmarking 4.64 percent of its 13F equity portfolio to CERN.

As aggregate interest increased, some big names have been driving this bullishness. Echo Street Capital Management, managed by Greg Poole, assembled the largest position in Cerner Corporation (NASDAQ:CERN). Echo Street Capital Management had $25.4 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $10.4 million position during the quarter. The following funds were also among the new CERN investors: Sculptor Capital, Simon Sadler's Segantii Capital, and Louis Bacon's Moore Global Investments.

Let's now review hedge fund activity in other stocks similar to Cerner Corporation (NASDAQ:CERN). We will take a look at CoStar Group Inc (NASDAQ:CSGP), Essex Property Trust Inc (NYSE:ESS), TELUS Corporation (NYSE:TU), and M&T Bank Corporation (NYSE:MTB). This group of stocks' market caps match CERN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CSGP,35,1384331,3 ESS,18,400479,-1 TU,17,301500,4 MTB,29,1247730,-2 Average,24.75,833510,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $834 million. That figure was $955 million in CERN's case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand TELUS Corporation (NYSE:TU) is the least popular one with only 17 bullish hedge fund positions. Cerner Corporation (NASDAQ:CERN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CERN, though not to the same extent, as the stock returned 40.8% during 2019 (as of 12/23) and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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