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 Johnson & Johnson (NYSE:JNJ).
Johnson & Johnson (NYSE:JNJ) was in 63 hedge funds' portfolios at the end of June. JNJ has experienced a decrease in activity from the world's largest hedge funds in recent months. There were 69 hedge funds in our database with JNJ positions at the end of March. Our calculations also showed that JNJ isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a glance at the recent hedge fund action surrounding Johnson & Johnson (NYSE:JNJ).
What have hedge funds been doing with Johnson & Johnson (NYSE:JNJ)?
At the end of the second quarter, a total of 63 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the first quarter of 2019. By comparison, 66 hedge funds held shares or bullish call options in JNJ a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, Fisher Asset Management held the most valuable stake in Johnson & Johnson (NYSE:JNJ), which was worth $1649.2 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $921.9 million worth of shares. Moreover, D E Shaw, Yacktman Asset Management, and Renaissance Technologies were also bullish on Johnson & Johnson (NYSE:JNJ), allocating a large percentage of their portfolios to this stock.
Because Johnson & Johnson (NYSE:JNJ) has experienced falling interest from the entirety of the hedge funds we track, it's safe to say that there were a few money managers who sold off their positions entirely heading into Q3. Intriguingly, David Costen Haley's HBK Investments dropped the largest investment of the 750 funds followed by Insider Monkey, comprising an estimated $39.5 million in stock. Brian Ashford-Russell and Tim Woolley's fund, Polar Capital, also said goodbye to its stock, about $37.2 million worth. These transactions are important to note, as total hedge fund interest was cut by 6 funds heading into Q3.
Let's also examine hedge fund activity in other stocks similar to Johnson & Johnson (NYSE:JNJ). We will take a look at JPMorgan Chase & Co. (NYSE:JPM), Exxon Mobil Corporation (NYSE:XOM), Walmart Inc. (NYSE:WMT), and The Procter & Gamble Company (NYSE:PG). All of these stocks' market caps match JNJ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JPM,90,11264732,-10 XOM,50,1332153,1 WMT,56,4984995,-1 PG,58,9859098,2 Average,63.5,6860245,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 63.5 hedge funds with bullish positions and the average amount invested in these stocks was $6860 million. That figure was $6757 million in JNJ's case. JPMorgan Chase & Co. (NYSE:JPM) is the most popular stock in this table. On the other hand Exxon Mobil Corporation (NYSE:XOM) is the least popular one with only 50 bullish hedge fund positions. Johnson & Johnson (NYSE:JNJ) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately JNJ wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); JNJ investors were disappointed as the stock returned -6.4% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.