Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Merck & Co., Inc. (NYSE:MRK) investors should be aware of an increase in support from the world's most elite money managers of late. MRK was in 70 hedge funds' portfolios at the end of June. There were 64 hedge funds in our database with MRK holdings at the end of the previous quarter. Our calculations also showed that MRK ranked 30th among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the key hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).
Hedge fund activity in Merck & Co., Inc. (NYSE:MRK)
Heading into the third quarter of 2019, a total of 70 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MRK over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Merck & Co., Inc. (NYSE:MRK) was held by AQR Capital Management, which reported holding $953 million worth of stock at the end of March. It was followed by Arrowstreet Capital with a $774.6 million position. Other investors bullish on the company included Fisher Asset Management, D E Shaw, and Adage Capital Management.
As one would reasonably expect, key money managers were breaking ground themselves. Renaissance Technologies, managed by Jim Simons, created the most outsized position in Merck & Co., Inc. (NYSE:MRK). Renaissance Technologies had $110.5 million invested in the company at the end of the quarter. Benjamin A. Smith's Laurion Capital Management also made a $93.7 million investment in the stock during the quarter. The following funds were also among the new MRK investors: Irving Kahn's Kahn Brothers, Israel Englander's Millennium Management, and Michael Kharitonov and Jon David McAuliffe's Voleon Capital.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. These stocks are Intel Corporation (NASDAQ:INTC), Wells Fargo & Company (NYSE:WFC), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), and Novartis AG (NYSE:NVS). This group of stocks' market caps resemble MRK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INTC,43,3500915,-19 WFC,65,25938800,-8 TSM,42,4239857,3 NVS,30,1681993,-3 Average,45,8840391,-6.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 45 hedge funds with bullish positions and the average amount invested in these stocks was $8840 million. That figure was $4860 million in MRK's case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Merck & Co., Inc. (NYSE:MRK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MRK wasn't nearly as popular as the top 20 stocks and hedge funds that were betting on MRK were disappointed as the stock returned 1.1% during the third quarter and underperformed the market by a small margin. 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.