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2019 Review: Most Favored Hedge Fund Stocks vs. Thermo Fisher Scientific Inc. (TMO)

Asma UL Husna

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Thermo Fisher Scientific Inc. (NYSE:TMO) investors should pay attention to a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that TMO 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).

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 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.

[caption id="attachment_189672" align="aligncenter" width="450"] David Blood of Generation Investment Management[/caption]

David Blood

We leave no stone unturned when looking for the next great investment idea. For example 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. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to take a look at the key hedge fund action encompassing Thermo Fisher Scientific Inc. (NYSE:TMO).

How are hedge funds trading Thermo Fisher Scientific Inc. (NYSE:TMO)?

Heading into the fourth quarter of 2019, a total of 65 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TMO over the last 17 quarters. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, Generation Investment Management was the largest shareholder of Thermo Fisher Scientific Inc. (NYSE:TMO), with a stake worth $623.3 million reported as of the end of September. Trailing Generation Investment Management was AQR Capital Management, which amassed a stake valued at $482.5 million. Marshall Wace, Cantillon Capital Management, and Diamond Hill Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Cryder Capital allocated the biggest weight to Thermo Fisher Scientific Inc. (NYSE:TMO), around 15.49% of its 13F portfolio. Copernicus Capital Management is also relatively very bullish on the stock, dishing out 7.85 percent of its 13F equity portfolio to TMO.

Judging by the fact that Thermo Fisher Scientific Inc. (NYSE:TMO) has faced declining sentiment from the smart money, logic holds that there lies a certain "tier" of fund managers that slashed their full holdings heading into Q4. Intriguingly, Christopher James's Partner Fund Management said goodbye to the largest stake of the 750 funds watched by Insider Monkey, worth close to $47.2 million in stock, and Joe DiMenna's ZWEIG DIMENNA PARTNERS was right behind this move, as the fund cut about $15.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 7 funds heading into Q4.

Let's go over hedge fund activity in other stocks similar to Thermo Fisher Scientific Inc. (NYSE:TMO). We will take a look at Royal Bank of Canada (NYSE:RY), Amgen, Inc. (NASDAQ:AMGN), Sanofi (NASDAQ:SNY), and Union Pacific Corporation (NYSE:UNP). All of these stocks' market caps are similar to TMO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RY,17,491191,2 AMGN,48,2569750,6 SNY,27,985072,2 UNP,62,5197745,-2 Average,38.5,2310940,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.5 hedge funds with bullish positions and the average amount invested in these stocks was $2311 million. That figure was $3445 million in TMO's case. Union Pacific Corporation (NYSE:UNP) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Thermo Fisher Scientific Inc. (NYSE:TMO) is more popular among hedge funds. 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 TMO as the stock returned 47% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. 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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