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Philip Morris International Inc. (PM) vs. Hedge Fund Favorites in 2019

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Philip Morris International Inc. (NYSE:PM) a superb stock to buy now? Prominent investors are becoming more confident. The number of bullish hedge fund positions rose by 14 in recent months. Our calculations also showed that PM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_758429" align="alignnone" width="600"] Ric Dillon of Diamond Hill Capital[/caption]

Ric Dillon Diamond Hill Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's review the new hedge fund action encompassing Philip Morris International Inc. (NYSE:PM).

Hedge fund activity in Philip Morris International Inc. (NYSE:PM)

At Q3's end, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of 36% from the second quarter of 2019. By comparison, 41 hedge funds held shares or bullish call options in PM a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PM A Good Stock To Buy?

The largest stake in Philip Morris International Inc. (NYSE:PM) was held by Cedar Rock Capital, which reported holding $693.7 million worth of stock at the end of September. It was followed by Gardner Russo & Gardner with a $689.7 million position. Other investors bullish on the company included GQG Partners, Diamond Hill Capital, and Ariel Investments. In terms of the portfolio weights assigned to each position Cedar Rock Capital allocated the biggest weight to Philip Morris International Inc. (NYSE:PM), around 16.07% of its 13F portfolio. Chiron Investment Management is also relatively very bullish on the stock, dishing out 7.74 percent of its 13F equity portfolio to PM.

Consequently, some big names were breaking ground themselves. GQG Partners, managed by Rajiv Jain, established the largest position in Philip Morris International Inc. (NYSE:PM). GQG Partners had $439.9 million invested in the company at the end of the quarter. Ricky Sandler's Eminence Capital also made a $53.3 million investment in the stock during the quarter. The following funds were also among the new PM investors: Matthew Halbower's Pentwater Capital Management, Ken Heebner's Capital Growth Management, and Matthew Knauer and Mina Faltas's Nokota Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Philip Morris International Inc. (NYSE:PM) but similarly valued. These stocks are United Technologies Corporation (NYSE:UTX), Netflix, Inc. (NASDAQ:NFLX), AstraZeneca plc (NYSE:AZN), and Thermo Fisher Scientific Inc. (NYSE:TMO). This group of stocks' market caps resemble PM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UTX,68,6458342,3 NFLX,95,8996171,-11 AZN,25,1779111,1 TMO,65,3444543,-7 Average,63.25,5169542,-3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 63.25 hedge funds with bullish positions and the average amount invested in these stocks was $5170 million. That figure was $3693 million in PM's case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand AstraZeneca plc (NYSE:AZN) is the least popular one with only 25 bullish hedge fund positions. Philip Morris International Inc. (NYSE:PM) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on PM, though not to the same extent, as the stock returned 36.5% in 2019 (as of 12/23) and outperformed the market. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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