At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards CVS Health Corporation (NYSE:CVS) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is CVS Health Corporation (NYSE:CVS) undervalued? Money managers were taking a bearish view. The number of long hedge fund bets retreated by 6 lately. CVS Health Corporation (NYSE:CVS) was in 65 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 77. Our calculations also showed that CVS 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.
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.
Paul Tudor Jones of Tudor Investment Corp
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 we're going to review the recent hedge fund action encompassing CVS Health Corporation (NYSE:CVS).
Hedge fund activity in CVS Health Corporation (NYSE:CVS)
At second quarter's end, a total of 65 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the previous quarter. By comparison, 55 hedge funds held shares or bullish call options in CVS a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, D. E. Shaw's D E Shaw has the number one position in CVS Health Corporation (NYSE:CVS), worth close to $218.8 million, comprising 0.3% of its total 13F portfolio. Sitting at the No. 2 spot is Cliff Asness of AQR Capital Management, with a $218.6 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish encompass Ken Griffin's Citadel Investment Group, Phill Gross and Robert Atchinson's Adage Capital Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Owl Creek Asset Management allocated the biggest weight to CVS Health Corporation (NYSE:CVS), around 4.74% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, dishing out 4.15 percent of its 13F equity portfolio to CVS.
Because CVS Health Corporation (NYSE:CVS) has faced bearish sentiment from the smart money, logic holds that there lies a certain "tier" of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Arthur B Cohen and Joseph Healey's Healthcor Management LP dropped the largest stake of the 750 funds watched by Insider Monkey, comprising about $73.2 million in stock. Aaron Cowen's fund, Suvretta Capital Management, also cut its stock, about $64.1 million worth. These transactions are interesting, as total hedge fund interest fell by 6 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to CVS Health Corporation (NYSE:CVS). These stocks are Sony Corporation (NYSE:SNE), HDFC Bank Limited (NYSE:HDB), Fidelity National Information Services Inc. (NYSE:FIS), BlackRock, Inc. (NYSE:BLK), The Toronto-Dominion Bank (NYSE:TD), S&P Global Inc. (NYSE:SPGI), and BP plc (NYSE:BP). This group of stocks' market valuations resemble CVS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNE,28,598881,0 HDB,42,1177218,4 FIS,111,8173639,6 BLK,37,702091,-1 TD,15,155444,-4 SPGI,71,3024689,-2 BP,27,736756,-4 Average,47.3,2081245,-0.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.3 hedge funds with bullish positions and the average amount invested in these stocks was $2081 million. That figure was $1136 million in CVS's case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. CVS Health Corporation (NYSE:CVS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CVS is 50.4. 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 positive signal but 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 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately CVS wasn't nearly as popular as these 10 stocks and hedge funds that were betting on CVS were disappointed as the stock returned -0.9% during the same time period 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.