U.S. Markets closed

Hedge Fund Consensus Stocks vs. Merck & Co., Inc. (MRK) In 2019

Debasis Saha

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Merck & Co., Inc. (NYSE:MRK) and see how the stock performed in comparison to hedge funds' consensus picks.

Merck & Co., Inc. (NYSE:MRK) investors should pay attention to an increase in activity from the world's largest hedge funds of late. MRK was in 73 hedge funds' portfolios at the end of the third quarter of 2019. There were 70 hedge funds in our database with MRK positions at the end of the previous quarter. Our calculations also showed that MRK currently ranks 28th 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.

[caption id="attachment_26335" align="alignnone" width="600"] Ken Fisher of Fisher Asset Management[/caption]

Ken Fisher FISHER ASSET MANAGEMENT

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 analyze the latest hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).

What have hedge funds been doing with Merck & Co., Inc. (NYSE:MRK)?

At Q3's end, a total of 73 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 63 hedge funds with a bullish position in MRK a year ago. With hedge funds' capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Is MRK A Good Stock To Buy?

Among these funds, Fisher Asset Management held the most valuable stake in Merck & Co., Inc. (NYSE:MRK), which was worth $757.3 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $702 million worth of shares. AQR Capital Management, Renaissance Technologies, and D E Shaw 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 Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 11.29% of its 13F portfolio. Copernicus Capital Management is also relatively very bullish on the stock, setting aside 5.79 percent of its 13F equity portfolio to MRK.

As one would reasonably expect, specific money managers have been driving this bullishness. Laurion Capital Management, managed by Benjamin A. Smith, created the largest call position in Merck & Co., Inc. (NYSE:MRK). Laurion Capital Management had $43.4 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser's Magnetar Capital also made a $18.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Steven Boyd's Armistice Capital, Ken Heebner's Capital Growth Management, and David Costen Haley's HBK Investments.

Let's also examine hedge fund activity in other stocks similar to Merck & Co., Inc. (NYSE:MRK). These stocks are The Boeing Company (NYSE:BA), Cisco Systems, Inc. (NASDAQ:CSCO), UnitedHealth Group Inc. (NYSE:UNH), and Comcast Corporation (NASDAQ:CMCSA). This group of stocks' market caps are similar to MRK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BA,78,3964531,4 CSCO,58,4154237,3 UNH,77,5610847,9 CMCSA,82,6384615,-4 Average,73.75,5028558,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 73.75 hedge funds with bullish positions and the average amount invested in these stocks was $5029 million. That figure was $4568 million in MRK's case. Comcast Corporation (NASDAQ:CMCSA) is the most popular stock in this table. On the other hand Cisco Systems, Inc. (NASDAQ:CSCO) is the least popular one with only 58 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the least popular stock in this group but hedge fund interest is still below 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. Unfortunately MRK wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MRK investors were disappointed as the stock returned 23.3% in 2019 (as of 12/23) and trailed 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 70 percent of these stocks already outperformed the market in Q4. 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