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Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title "Recession is Imminent: We Need A Travel Ban NOW". We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
Is McKesson Corporation (NYSE:MCK) a good equity to bet on right now? We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
McKesson Corporation (NYSE:MCK) shareholders have witnessed an increase in enthusiasm from smart money lately. MCK was in 51 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 45 hedge funds in our database with MCK holdings at the end of the previous quarter. Our calculations also showed that MCK isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 41 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.
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Richard S. Pzena of Pzena Investment Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let's take a glance at the recent hedge fund action surrounding McKesson Corporation (NYSE:MCK).
Hedge fund activity in McKesson Corporation (NYSE:MCK)
At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. On the other hand, there were a total of 44 hedge funds with a bullish position in MCK a year ago. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
The largest stake in McKesson Corporation (NYSE:MCK) was held by Pzena Investment Management, which reported holding $520.2 million worth of stock at the end of September. It was followed by Glenview Capital with a $513.5 million position. Other investors bullish on the company included AQR Capital Management, Baupost Group, and Viking Global. In terms of the portfolio weights assigned to each position Tavio Capital allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 7.33% of its 13F portfolio. Glenview Capital is also relatively very bullish on the stock, dishing out 4.49 percent of its 13F equity portfolio to MCK.
Consequently, key money managers were breaking ground themselves. Viking Global, managed by Andreas Halvorsen, assembled the biggest position in McKesson Corporation (NYSE:MCK). Viking Global had $208.6 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $46.9 million investment in the stock during the quarter. The following funds were also among the new MCK investors: Kevin Molloy's Iron Triangle Partners, Michael Kharitonov and Jon David McAuliffe's Voleon Capital, and Steve Cohen's Point72 Asset Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as McKesson Corporation (NYSE:MCK) but similarly valued. These stocks are Twitter Inc (NYSE:TWTR), KKR & Co Inc. (NYSE:KKR), Xilinx, Inc. (NASDAQ:XLNX), and Verisk Analytics, Inc. (NASDAQ:VRSK). This group of stocks' market valuations resemble MCK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TWTR,55,1427081,0 KKR,56,3623655,13 XLNX,42,1025915,-1 VRSK,33,848898,-1 Average,46.5,1731387,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 46.5 hedge funds with bullish positions and the average amount invested in these stocks was $1731 million. That figure was $2269 million in MCK's case. KKR & Co Inc. (NYSE:KKR) is the most popular stock in this table. On the other hand Verisk Analytics, Inc. (NASDAQ:VRSK) is the least popular one with only 33 bullish hedge fund positions. McKesson Corporation (NYSE:MCK) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still beat the market by 1.9 percentage points. Hedge funds were also right about betting on MCK as the stock returned -4.3% during the first quarter (through March 9th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.