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Were Hedge Funds Right About Avoiding Walgreens Boots Alliance Inc (WBA)?

Abigail Fisher
·6 min read

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 Walgreens Boots Alliance Inc (NASDAQ:WBA)? The smart money sentiment can provide an answer to this question.

Hedge fund interest in Walgreens Boots Alliance Inc (NASDAQ:WBA) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that WBA isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare WBA to other stocks including Emerson Electric Co. (NYSE:EMR), eBay Inc (NASDAQ:EBAY), and Centene Corporation (NYSE:CNC) to get a better sense of its popularity. Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Michael Castor Sio Capital
Michael Castor Sio Capital

Michael Castor of Sio Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let's take a peek at the new hedge fund action encompassing Walgreens Boots Alliance Inc (NASDAQ:WBA).

Hedge fund activity in Walgreens Boots Alliance Inc (NASDAQ:WBA)

At Q2's end, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WBA over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in Walgreens Boots Alliance Inc (NASDAQ:WBA), which was worth $161.5 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $50.5 million worth of shares. Citadel Investment Group, Woodline Partners, and Adage Capital Management 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 5.41% of its 13F portfolio. Cerebellum Capital is also relatively very bullish on the stock, dishing out 2.46 percent of its 13F equity portfolio to WBA.

Seeing as Walgreens Boots Alliance Inc (NASDAQ:WBA) has faced falling interest from the aggregate hedge fund industry, it's easy to see that there were a few money managers who sold off their entire stakes by the end of the second quarter. Intriguingly, Tom Gayner's Markel Gayner Asset Management dumped the biggest investment of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $81.5 million in stock. Anand Parekh's fund, Alyeska Investment Group, also sold off its stock, about $26.8 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Walgreens Boots Alliance Inc (NASDAQ:WBA) but similarly valued. These stocks are Emerson Electric Co. (NYSE:EMR), eBay Inc (NASDAQ:EBAY), Centene Corporation (NYSE:CNC), FedEx Corporation (NYSE:FDX), L3Harris Technologies, Inc. (NYSE:LHX), Monster Beverage Corp (NASDAQ:MNST), and General Motors Company (NYSE:GM). All of these stocks' market caps are closest to WBA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EMR,36,421821,3 EBAY,58,5017459,6 CNC,71,3079774,5 FDX,46,1254577,-4 LHX,50,1312574,7 MNST,35,1880728,-8 GM,69,4380069,16 Average,52.1,2478143,3.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 52.1 hedge funds with bullish positions and the average amount invested in these stocks was $2478 million. That figure was $490 million in WBA's case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Monster Beverage Corp (NASDAQ:MNST) is the least popular one with only 35 bullish hedge fund positions. Walgreens Boots Alliance Inc (NASDAQ:WBA) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for WBA is 33.7. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and surpassed the market by 21 percentage points. Unfortunately WBA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); WBA investors were disappointed as the stock returned -9.2% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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