U.S. Markets close in 6 hrs 18 mins

2019 Review: Most Favored Hedge Fund Stocks vs. McKesson Corporation (MCK)

Debasis Saha

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 McKesson Corporation (NYSE:MCK).

Is McKesson Corporation (NYSE:MCK) a first-rate stock to buy now? Investors who are in the know are getting more bullish. The number of bullish hedge fund positions moved up by 3 lately. Our calculations also showed that MCK 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). MCK was in 39 hedge funds' portfolios at the end of the third quarter of 2019. There were 36 hedge funds in our database with MCK positions at the end of the previous quarter.

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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.

[caption id="attachment_26869" align="alignnone" width="600"] Larry Robbins of Glenview Capital[/caption]

GLENVIEW CAPITAL

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. Now let's take a gander at the recent hedge fund action encompassing McKesson Corporation (NYSE:MCK).

How have hedgies been trading McKesson Corporation (NYSE:MCK)?

At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MCK over the last 17 quarters. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is MCK A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Glenview Capital, managed by Larry Robbins, holds the most valuable position in McKesson Corporation (NYSE:MCK). Glenview Capital has a $547.3 million position in the stock, comprising 5.8% of its 13F portfolio. Sitting at the No. 2 spot is Richard S. Pzena of Pzena Investment Management, with a $498.3 million position; 2.7% of its 13F portfolio is allocated to the stock. Some other peers that are bullish encompass Cliff Asness's AQR Capital Management, Seth Klarman's Baupost Group and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Tavio Capital allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 13.4% of its 13F portfolio. Glenview Capital is also relatively very bullish on the stock, designating 5.76 percent of its 13F equity portfolio to MCK.

Now, specific money managers were leading the bulls' herd. Partner Fund Management, managed by Christopher James, initiated the most outsized call position in McKesson Corporation (NYSE:MCK). Partner Fund Management had $22.9 million invested in the company at the end of the quarter. Brad Farber's Atika Capital also initiated a $13.7 million position during the quarter. The following funds were also among the new MCK investors: Ryan Caldwell's Chiron Investment Management, Michael Castor's Sio Capital, and Matthew Tewksbury's Stevens Capital Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as McKesson Corporation (NYSE:MCK) but similarly valued. These stocks are Sprint Corporation (NYSE:S), Lululemon Athletica inc. (NASDAQ:LULU), Willis Towers Watson Public Limited Company (NASDAQ:WLTW), and FleetCor Technologies, Inc. (NYSE:FLT). This group of stocks' market valuations resemble MCK's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position S,23,885703,-2 LULU,46,1527406,-3 WLTW,35,1905841,2 FLT,42,2138351,2 Average,36.5,1614325,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1614 million. That figure was $1982 million in MCK's case. Lululemon Athletica inc. (NASDAQ:LULU) is the most popular stock in this table. On the other hand Sprint Corporation (NYSE:S) is the least popular one with only 23 bullish hedge fund positions. McKesson Corporation (NYSE:MCK) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately MCK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MCK were disappointed as the stock returned 26.1% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. 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.

Related Content