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Walgreens Boots Alliance Inc (WBA) vs. Hedge Fund Favorites in 2019

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Walgreens Boots Alliance Inc (NASDAQ:WBA).

Walgreens Boots Alliance Inc (NASDAQ:WBA) was in 34 hedge funds' portfolios at the end of the third quarter of 2019. WBA investors should be aware of a decrease in hedge fund interest in recent months. There were 41 hedge funds in our database with WBA positions at the end of the previous quarter. Our calculations also showed that WBA 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).

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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_193030" align="alignnone" width="600"] Tom Gayner of Markel Gayner Asset Management[/caption]

Tom Gayner

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. Now let's take a glance at the key hedge fund action regarding Walgreens Boots Alliance Inc (NASDAQ:WBA).

How are hedge funds trading Walgreens Boots Alliance Inc (NASDAQ:WBA)?

At the end of the third quarter, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 34 hedge funds with a bullish position in WBA a year ago. With the smart money's capital changing hands, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is WBA A Good Stock To Buy?

Among these funds, Two Sigma Advisors held the most valuable stake in Walgreens Boots Alliance Inc (NASDAQ:WBA), which was worth $187 million at the end of the third quarter. On the second spot was Markel Gayner Asset Management which amassed $118.9 million worth of shares. Arrowstreet Capital, AQR Capital Management, and D E Shaw 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 Healthcare Value Capital allocated the biggest weight to Walgreens Boots Alliance Inc (NASDAQ:WBA), around 5% of its 13F portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, earmarking 1.8 percent of its 13F equity portfolio to WBA.

Due to the fact that Walgreens Boots Alliance Inc (NASDAQ:WBA) has faced a decline in interest from the aggregate hedge fund industry, it's safe to say that there were a few funds who sold off their positions entirely by the end of the third quarter. It's worth mentioning that Renaissance Technologies dropped the biggest investment of all the hedgies watched by Insider Monkey, comprising about $18.8 million in stock, and Matthew Tewksbury's Stevens Capital Management was right behind this move, as the fund cut about $12.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 7 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Walgreens Boots Alliance Inc (NASDAQ:WBA). We will take a look at Suncor Energy Inc. (NYSE:SU), America Movil SAB de CV (NYSE:AMX), Equinix Inc (NASDAQ:EQIX), and Air Products & Chemicals, Inc. (NYSE:APD). This group of stocks' market caps match WBA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SU,37,1416790,5 AMX,9,188555,0 EQIX,33,1580931,-5 APD,38,478746,6 Average,29.25,916256,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $916 million. That figure was $831 million in WBA's case. Air Products & Chemicals, Inc. (NYSE:APD) is the most popular stock in this table. On the other hand America Movil SAB de CV (NYSE:AMX) is the least popular one with only 9 bullish hedge fund positions. Walgreens Boots Alliance Inc (NASDAQ:WBA) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately WBA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WBA were disappointed as the stock returned -11.6% in 2019 (through December 23rd) 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 this year. 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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