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Were Hedge Funds Right About Centene Corporation (CNC)?

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While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Centene Corporation (NYSE:CNC).

Is Centene Corporation (NYSE:CNC) a healthy stock for your portfolio? Investors who are in the know were getting more bullish. The number of bullish hedge fund bets advanced by 5 in recent months. Centene Corporation (NYSE:CNC) was in 71 hedge funds' portfolios at the end of June. The all time high for this statistics is 66. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CNC 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 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 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.

Ken Heebner of Capital Growth Management

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. Now let's view the key hedge fund action surrounding Centene Corporation (NYSE:CNC).

Hedge fund activity in Centene Corporation (NYSE:CNC)

At the end of the second quarter, a total of 71 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the first quarter of 2020. On the other hand, there were a total of 65 hedge funds with a bullish position in CNC a year ago. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Andreas Halvorsen's Viking Global has the most valuable position in Centene Corporation (NYSE:CNC), worth close to $1.0236 billion, comprising 4.4% of its total 13F portfolio. The second most bullish fund manager is Farallon Capital, holding a $444.9 million position; the fund has 3.7% of its 13F portfolio invested in the stock. Other professional money managers that are bullish encompass John Smith Clark's Southpoint Capital Advisors, Steve Cohen's Point72 Asset Management and Patrick Degorce's Theleme Partners. In terms of the portfolio weights assigned to each position Bridger Management allocated the biggest weight to Centene Corporation (NYSE:CNC), around 5.29% of its 13F portfolio. Theleme Partners is also relatively very bullish on the stock, earmarking 5.22 percent of its 13F equity portfolio to CNC.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Woodline Partners, managed by Michael Rockefeller and KarláKroeker, established the most outsized position in Centene Corporation (NYSE:CNC). Woodline Partners had $33.9 million invested in the company at the end of the quarter. Alok Agrawal's Bloom Tree Partners also initiated a $27 million position during the quarter. The following funds were also among the new CNC investors: Jerome Pfund and Michael Sjostrom's Sectoral Asset Management, Ken Heebner's Capital Growth Management, and John Brennan's Sirios Capital Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Centene Corporation (NYSE:CNC) but similarly valued. We will take a look at FedEx Corporation (NYSE:FDX), L3Harris Technologies, Inc. (NYSE:LHX), Monster Beverage Corp (NASDAQ:MNST), General Motors Company (NYSE:GM), Exelon Corporation (NASDAQ:EXC), Veeva Systems Inc (NYSE:VEEV), and Eaton Corporation plc (NYSE:ETN). This group of stocks' market caps are similar to CNC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FDX,46,1254577,-4 LHX,50,1312574,7 MNST,35,1880728,-8 GM,69,4380069,16 EXC,30,772535,-3 VEEV,35,529727,2 ETN,34,560308,-1 Average,42.7,1527217,1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.7 hedge funds with bullish positions and the average amount invested in these stocks was $1527 million. That figure was $3080 million in CNC's case. General Motors Company (NYSE:GM) is the most popular stock in this table. On the other hand Exelon Corporation (NASDAQ:EXC) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Centene Corporation (NYSE:CNC) is more popular among hedge funds. Our overall hedge fund sentiment score for CNC is 90. 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. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Unfortunately CNC wasn't nearly as popular as these 10 stocks and hedge funds that were betting on CNC were disappointed as the stock returned 4.2% since the end of the second quarter (through 10/16) 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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