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 Walgreens Boots Alliance Inc (NASDAQ:WBA) and determine whether hedge funds had an edge regarding this stock.
Walgreens Boots Alliance Inc (NASDAQ:WBA) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 45 hedge funds' portfolios at the end of June. Our calculations also showed that WBA isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare WBA to other stocks including Emerson Electric Co. (NYSE:EMR), eBay Inc (NASDAQ:EBAY), and Centene Corporation (NYSE:CNC) to get a better sense of its popularity. Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Michael Castor of Sio Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we're going to check out the latest hedge fund action encompassing Walgreens Boots Alliance Inc (NASDAQ:WBA).
Hedge fund activity in Walgreens Boots Alliance Inc (NASDAQ:WBA)
At Q2's end, a total of 45 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WBA over the last 20 quarters. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Walgreens Boots Alliance Inc (NASDAQ:WBA), with a stake worth $161.5 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $50.5 million. Citadel Investment Group, Woodline Partners, and Adage Capital Management 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 Healthcare Value Capital allocated the biggest weight to Walgreens Boots Alliance Inc (NASDAQ:WBA), around 5.41% of its 13F portfolio. Cerebellum Capital is also relatively very bullish on the stock, setting aside 2.46 percent of its 13F equity portfolio to WBA.
Due to the fact that Walgreens Boots Alliance Inc (NASDAQ:WBA) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedgies who sold off their entire stakes by the end of the second quarter. Interestingly, Tom Gayner's Markel Gayner Asset Management dumped the biggest position of the 750 funds tracked by Insider Monkey, valued at close to $81.5 million in stock, and Anand Parekh's Alyeska Investment Group was right behind this move, as the fund dumped about $26.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Walgreens Boots Alliance Inc (NASDAQ:WBA) but similarly valued. These stocks are Emerson Electric Co. (NYSE:EMR), eBay Inc (NASDAQ:EBAY), Centene Corporation (NYSE:CNC), FedEx Corporation (NYSE:FDX), L3Harris Technologies, Inc. (NYSE:LHX), Monster Beverage Corp (NASDAQ:MNST), and General Motors Company (NYSE:GM). This group of stocks' market valuations are closest to WBA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EMR,36,421821,3 EBAY,58,5017459,6 CNC,71,3079774,5 FDX,46,1254577,-4 LHX,50,1312574,7 MNST,35,1880728,-8 GM,69,4380069,16 Average,52.1,2478143,3.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 52.1 hedge funds with bullish positions and the average amount invested in these stocks was $2478 million. That figure was $490 million in WBA's case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Monster Beverage Corp (NASDAQ:MNST) is the least popular one with only 35 bullish hedge fund positions. Walgreens Boots Alliance Inc (NASDAQ:WBA) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for WBA is 33.7. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately WBA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); WBA investors were disappointed as the stock returned -9.3% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.