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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Merck & Co., Inc. (NYSE:MRK)? The smart money sentiment can provide an answer to this question.
Is MRK stock a buy or sell? Merck & Co., Inc. (NYSE:MRK) has experienced an increase in enthusiasm from smart money in recent months. Merck & Co., Inc. (NYSE:MRK) was in 82 hedge funds' portfolios at the end of December. The all time high for this statistic is 84. Our calculations also showed that MRK isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).
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 124 percentage points since March 2017 (see the details here).
Prem Watsa of Fairfax Financial Holdings
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 best cheap stocks to buy now to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage (or at the end of this article). Keeping this in mind let's analyze the key hedge fund action surrounding Merck & Co., Inc. (NYSE:MRK).
Do Hedge Funds Think MRK Is A Good Stock To Buy Now?
At fourth quarter's end, a total of 82 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the third quarter of 2020. On the other hand, there were a total of 77 hedge funds with a bullish position in MRK a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
More specifically, Berkshire Hathaway was the largest shareholder of Merck & Co., Inc. (NYSE:MRK), with a stake worth $2347.5 million reported as of the end of December. Trailing Berkshire Hathaway was D E Shaw, which amassed a stake valued at $811.2 million. Fisher Asset Management, AQR Capital Management, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 10.43% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, setting aside 6.86 percent of its 13F equity portfolio to MRK.
Now, key money managers were breaking ground themselves. Levin Easterly Partners, managed by John Murphy, established the most valuable position in Merck & Co., Inc. (NYSE:MRK). Levin Easterly Partners had $26.7 million invested in the company at the end of the quarter. Prem Watsa's Fairfax Financial Holdings also made a $10.1 million investment in the stock during the quarter. The following funds were also among the new MRK investors: Nicholas Bagnall's Te Ahumairangi Investment Management, Benjamin A. Smith's Laurion Capital Management, and Vishal Saluja and Pham Quang's Endurant Capital Management.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. These stocks are ASML Holding N.V. (NASDAQ:ASML), PepsiCo, Inc. (NASDAQ:PEP), AT&T Inc. (NYSE:T), Pfizer Inc. (NYSE:PFE), salesforce.com, inc. (NYSE:CRM), Intel Corporation (NASDAQ:INTC), and Abbott Laboratories (NYSE:ABT). This group of stocks' market valuations match MRK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ASML,30,2976227,7 PEP,56,4288005,4 T,58,1045081,7 PFE,63,1848417,-3 CRM,97,10576035,-9 INTC,72,5578824,6 ABT,64,4303482,2 Average,62.9,4373724,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 62.9 hedge funds with bullish positions and the average amount invested in these stocks was $4374 million. That figure was $7171 million in MRK's case. salesforce.com, inc. (NYSE:CRM) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 30 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. Our overall hedge fund sentiment score for MRK is 75.1. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 7% in 2021 through March 12th and beat the market again by 1.6 percentage points. Unfortunately MRK wasn't nearly as popular as these 30 stocks and hedge funds that were betting on MRK were disappointed as the stock returned -8% since the end of December (through 3/12) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.