"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Merck & Co., Inc. (NYSE:MRK) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Merck & Co., Inc. (NYSE:MRK) was in 64 hedge funds' portfolios at the end of the first quarter of 2019. MRK has seen a decrease in enthusiasm from smart money lately. There were 68 hedge funds in our database with MRK holdings at the end of the previous quarter. Our calculations also showed that MRK 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.
Let's go over the fresh hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).
Hedge fund activity in Merck & Co., Inc. (NYSE:MRK)
At Q1's end, a total of 64 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. By comparison, 63 hedge funds held shares or bullish call options in MRK a year ago. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in Merck & Co., Inc. (NYSE:MRK) was held by AQR Capital Management, which reported holding $1039.5 million worth of stock at the end of March. It was followed by Fisher Asset Management with a $643.9 million position. Other investors bullish on the company included Arrowstreet Capital, D E Shaw, and Adage Capital Management.
Judging by the fact that Merck & Co., Inc. (NYSE:MRK) has faced bearish sentiment from hedge fund managers, it's easy to see that there were a few money managers that decided to sell off their full holdings in the third quarter. It's worth mentioning that Israel Englander's Millennium Management dumped the largest position of the 700 funds followed by Insider Monkey, valued at about $374.9 million in stock. Dan Loeb's fund, Third Point, also sold off its stock, about $212 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 4 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Merck & Co., Inc. (NYSE:MRK). These stocks are Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), China Mobile Limited (NYSE:CHL), The Coca-Cola Company (NYSE:KO), and The Walt Disney Company (NYSE:DIS). All of these stocks' market caps resemble MRK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSM,39,3547334,2 CHL,19,410052,5 KO,48,20680037,-5 DIS,114,7045572,43 Average,55,7920749,11.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 55 hedge funds with bullish positions and the average amount invested in these stocks was $7921 million. That figure was $4602 million in MRK's case. The Walt Disney Company (NYSE:DIS) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 19 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately MRK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MRK were disappointed as the stock returned -4.2% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
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