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Do Hedge Funds Love Zoetis Inc (ZTS)?

Debasis Saha
·7 mins read

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Zoetis Inc (NYSE:ZTS) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Is Zoetis Inc (NYSE:ZTS) a buy right now? Money managers were in a bearish mood. The number of long hedge fund bets were trimmed by 2 in recent months. Zoetis Inc (NYSE:ZTS) was in 58 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 60. Our calculations also showed that ZTS 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). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 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. 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.

William Von Mueffling - Cantillon Capital Management
William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 go through lists like the 10 most profitable companies in America 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's go over the recent hedge fund action regarding Zoetis Inc (NYSE:ZTS).

How have hedgies been trading Zoetis Inc (NYSE:ZTS)?

Heading into the third quarter of 2020, a total of 58 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the first quarter of 2020. On the other hand, there were a total of 40 hedge funds with a bullish position in ZTS a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

Is ZTS A Good Stock To Buy?
Is ZTS A Good Stock To Buy?

The largest stake in Zoetis Inc (NYSE:ZTS) was held by Cantillon Capital Management, which reported holding $404.7 million worth of stock at the end of September. It was followed by Marshall Wace LLP with a $289.8 million position. Other investors bullish on the company included Ako Capital, Renaissance Technologies, and Intermede Investment Partners. In terms of the portfolio weights assigned to each position Intermede Investment Partners allocated the biggest weight to Zoetis Inc (NYSE:ZTS), around 5.66% of its 13F portfolio. Marlowe Partners is also relatively very bullish on the stock, setting aside 5.05 percent of its 13F equity portfolio to ZTS.

Since Zoetis Inc (NYSE:ZTS) has witnessed declining sentiment from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of hedge funds who sold off their full holdings by the end of the second quarter. Interestingly, Benjamin A. Smith's Laurion Capital Management sold off the largest stake of the 750 funds tracked by Insider Monkey, comprising about $12.3 million in stock. Ben Gambill's fund, Tiger Eye Capital, also cut its stock, about $10.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 2 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks similar to Zoetis Inc (NYSE:ZTS). We will take a look at VMware, Inc. (NYSE:VMW), Automatic Data Processing (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), China Petroleum & Chemical Corp (NYSE:SNP), and Equinix Inc (NASDAQ:EQIX). This group of stocks' market valuations are closest to ZTS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VMW,42,696435,15 ADP,49,1802478,3 REGN,49,1604372,7 CNI,28,2050472,2 CL,50,1699344,-3 SNP,10,168521,1 EQIX,49,2314147,-6 Average,39.6,1476538,2.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $1477 million. That figure was $1985 million in ZTS's case. Colgate-Palmolive Company (NYSE:CL) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zoetis Inc (NYSE:ZTS) is more popular among hedge funds. Our overall hedge fund sentiment score for ZTS is 82. 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 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 returned 28.2% in 2020 through August 24th but still managed to beat the market by 20.6 percentage points. Hedge funds were also right about betting on ZTS as the stock returned 14.6% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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