A market correction in the fourth quarter, spurred by a number of global macroeconomic concerns and rising interest rates ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by nearly 7 percentage points during the fourth quarter. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let's study the hedge fund sentiment to see how those concerns affected their ownership of Stryker Corporation (NYSE:SYK) during the quarter.
Stryker Corporation (NYSE:SYK) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 44 hedge funds' portfolios at the end of the fourth quarter of 2018. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Mondelez International Inc (NASDAQ:MDLZ), Automatic Data Processing, Inc. (NASDAQ:ADP), and Eni SpA (NYSE:E) to gather more data points.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.
We're going to check out the recent hedge fund action regarding Stryker Corporation (NYSE:SYK).
Hedge fund activity in Stryker Corporation (NYSE:SYK)
At the end of the fourth quarter, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 29 hedge funds with a bullish position in SYK a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Stryker Corporation (NYSE:SYK) was held by AQR Capital Management, which reported holding $90.7 million worth of stock at the end of September. It was followed by Millennium Management with a $85.5 million position. Other investors bullish on the company included Citadel Investment Group, Adage Capital Management, and Point72 Asset Management.
Because Stryker Corporation (NYSE:SYK) has experienced a decline in interest from the smart money, it's safe to say that there was a specific group of hedgies who sold off their positions entirely in the third quarter. At the top of the heap, Gabriel Plotkin's Melvin Capital Management dumped the biggest investment of the "upper crust" of funds watched by Insider Monkey, valued at about $48.9 million in stock. Jason Karp's fund, Tourbillon Capital Partners, also said goodbye to its stock, about $17.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Stryker Corporation (NYSE:SYK). These stocks are Mondelez International Inc (NASDAQ:MDLZ), Automatic Data Processing, Inc. (NASDAQ:ADP), Eni SpA (NYSE:E), and Tesla Inc. (NASDAQ:TSLA). This group of stocks' market values resemble SYK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MDLZ,45,1739884,-1 ADP,42,2979929,7 E,7,87961,0 TSLA,47,878615,16 Average,35.25,1421597,5.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $1422 million. That figure was $621 million in SYK's case. Tesla Inc. (NASDAQ:TSLA) is the most popular stock in this table. On the other hand Eni SpA (NYSE:E) is the least popular one with only 7 bullish hedge fund positions. Stryker Corporation (NYSE:SYK) is not the most popular stock in this group but hedge fund interest is still above average. We should also note that hedge fund sentiment towards the stock has been increasing for the past 2.5 years. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on SYK as the stock returned 23.8% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.