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Hedge Funds Are Dumping Quest Diagnostics Incorporated (DGX)

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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Quest Diagnostics Incorporated (NYSE:DGX).

Quest Diagnostics Incorporated (NYSE:DGX) was in 31 hedge funds' portfolios at the end of June. The all time high for this statistic is 46. DGX shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 34 hedge funds in our database with DGX holdings at the end of March. Our calculations also showed that DGX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Overdeck of Two Sigma
John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let's analyze the fresh hedge fund action encompassing Quest Diagnostics Incorporated (NYSE:DGX).

Do Hedge Funds Think DGX Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DGX over the last 24 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Quest Diagnostics Incorporated (NYSE:DGX) was held by Two Sigma Advisors, which reported holding $77.2 million worth of stock at the end of June. It was followed by AQR Capital Management with a $49 million position. Other investors bullish on the company included D E Shaw, Millennium Management, and Impax Asset Management. In terms of the portfolio weights assigned to each position Te Ahumairangi Investment Management allocated the biggest weight to Quest Diagnostics Incorporated (NYSE:DGX), around 1.63% of its 13F portfolio. Tamarack Capital Management is also relatively very bullish on the stock, designating 0.56 percent of its 13F equity portfolio to DGX.

Since Quest Diagnostics Incorporated (NYSE:DGX) has experienced declining sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of money managers that slashed their positions entirely heading into Q3. Interestingly, Andrew Sandler's Sandler Capital Management sold off the biggest position of the 750 funds monitored by Insider Monkey, valued at an estimated $10.9 million in stock. Thyra Zerhusen's fund, Fairpointe Capital, also dropped its stock, about $0.7 million worth. These transactions are important to note, as total hedge fund interest was cut by 3 funds heading into Q3.

Let's also examine hedge fund activity in other stocks similar to Quest Diagnostics Incorporated (NYSE:DGX). We will take a look at Eastman Chemical Company (NYSE:EMN), Companhia Paranaense de Energia - COPEL (NYSE:ELP), NortonLifeLock Inc. (NASDAQ:NLOK), Nomura Holdings, Inc. (NYSE:NMR), Novavax, Inc. (NASDAQ:NVAX), Arch Capital Group Ltd. (NASDAQ:ACGL), and Check Point Software Technologies Ltd. (NASDAQ:CHKP). All of these stocks' market caps are similar to DGX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EMN,27,156403,0 ELP,13,43466,8 NLOK,36,1340848,4 NMR,7,17637,-3 NVAX,37,1172482,-1 ACGL,22,1438952,-12 CHKP,29,646892,-2 Average,24.4,688097,-0.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.4 hedge funds with bullish positions and the average amount invested in these stocks was $688 million. That figure was $377 million in DGX's case. Novavax, Inc. (NASDAQ:NVAX) is the most popular stock in this table. On the other hand Nomura Holdings, Inc. (NYSE:NMR) is the least popular one with only 7 bullish hedge fund positions. Quest Diagnostics Incorporated (NYSE:DGX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DGX is 62.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Hedge funds were also right about betting on DGX as the stock returned 9% since the end of Q2 (through 10/15) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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