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Smith & Nephew (SNN): Are Hedge Funds Right About Dumping This Stock?

Asma UL Husna

Will the new coronavirus cause a recession in US in the next 6 months? On February 27th, we put the probability at 75% and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Smith & Nephew plc (NYSE:SNN).

Smith & Nephew plc (NYSE:SNN) investors should be aware of a decrease in hedge fund interest recently. Our calculations also showed that SNN 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26335" align="aligncenter" width="399"] Ken Fisher of Fisher Asset Management[/caption]

Ken Fisher FISHER ASSET MANAGEMENT

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind we're going to take a gander at the key hedge fund action surrounding Smith & Nephew plc (NYSE:SNN).

How are hedge funds trading Smith & Nephew plc (NYSE:SNN)?

Heading into the first quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -50% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in SNN a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the largest position in Smith & Nephew plc (NYSE:SNN). Arrowstreet Capital has a $127.1 million position in the stock, comprising 0.3% of its 13F portfolio. The second most bullish fund manager is Krishen Sud of Sivik Global Healthcare, with a $3.6 million position; 1.3% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that hold long positions comprise Israel Englander's Millennium Management, Ken Fisher's Fisher Asset Management and Matthew Hulsizer's PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Sivik Global Healthcare allocated the biggest weight to Smith & Nephew plc (NYSE:SNN), around 1.34% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, designating 0.3 percent of its 13F equity portfolio to SNN.

Due to the fact that Smith & Nephew plc (NYSE:SNN) has faced falling interest from the aggregate hedge fund industry, we can see that there is a sect of funds who were dropping their entire stakes by the end of the third quarter. At the top of the heap, David Cohen and Harold Levy's Iridian Asset Management said goodbye to the largest stake of the "upper crust" of funds monitored by Insider Monkey, valued at close to $124 million in stock. Efrem Kamen's fund, Pura Vida Investments, also dropped its stock, about $8.7 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds by the end of the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Smith & Nephew plc (NYSE:SNN) but similarly valued. These stocks are Synopsys, Inc. (NASDAQ:SNPS), Veeva Systems Inc (NYSE:VEEV), Brown-Forman Corporation (NYSE:BF), and Nokia Corporation (NYSE:NOK). This group of stocks' market caps are similar to SNN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNPS,45,1164571,0 VEEV,44,766454,8 BF,23,609563,1 NOK,16,227900,-8 Average,32,692122,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $692 million. That figure was $131 million in SNN's case. Synopsys, Inc. (NASDAQ:SNPS) is the most popular stock in this table. On the other hand Nokia Corporation (NYSE:NOK) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Smith & Nephew plc (NYSE:SNN) is even less popular than NOK. Hedge funds dodged a bullet by taking a bearish stance towards SNN. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately SNN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SNN investors were disappointed as the stock returned -38.3% during the same time 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 most of these stocks already outperformed the market so far in Q1.

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

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