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Were Hedge Funds Right About Crowding Into Zoetis Inc (ZTS)?

Reymerlyn Martin
·6 min read

In this article you are going to find out whether hedge funds think Zoetis Inc (NYSE:ZTS) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Zoetis Inc (NYSE:ZTS) an excellent stock to buy now? The best stock pickers were cutting their exposure. The number of bullish hedge fund positions decreased by 2 lately. Zoetis Inc (NYSE:ZTS) was in 58 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 60. Our calculations also showed that ZTS 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). There were 60 hedge funds in our database with ZTS positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

In today’s marketplace there are a multitude of indicators stock traders employ to size up stocks. A duo of the most useful indicators are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the top picks of the best investment managers can trounce their index-focused peers by a healthy amount (see the details here).

Paul Marshall Marshall Wace
Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

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. With all of this in mind let's go over the new hedge fund action surrounding Zoetis Inc (NYSE:ZTS).

How are hedge funds trading Zoetis Inc (NYSE:ZTS)?

At the end of June, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ZTS over the last 20 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, William von Mueffling's Cantillon Capital Management has the most valuable position in Zoetis Inc (NYSE:ZTS), worth close to $404.7 million, comprising 3.5% of its total 13F portfolio. Coming in second is Marshall Wace LLP, led by Paul Marshall and Ian Wace, holding a $289.8 million position; the fund has 2% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish consist of Nicolai Tangen's Ako Capital, Renaissance Technologies and Barry Dargan's Intermede Investment Partners. In terms of the portfolio weights assigned to each position Intermede Investment Partners allocated the biggest weight to Zoetis Inc (NYSE:ZTS), around 5.66% of its 13F portfolio. Marlowe Partners is also relatively very bullish on the stock, setting aside 5.05 percent of its 13F equity portfolio to ZTS.

Seeing as Zoetis Inc (NYSE:ZTS) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there were a few funds that slashed their positions entirely by the end of the second quarter. Interestingly, Benjamin A. Smith's Laurion Capital Management dropped the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $12.3 million in stock, and Ben Gambill's Tiger Eye Capital was right behind this move, as the fund dumped about $10.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 2 funds by the end of the second quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Zoetis Inc (NYSE:ZTS) but similarly valued. We will take a look at VMware, Inc. (NYSE:VMW), Automatic Data Processing (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), China Petroleum & Chemical Corp (NYSE:SNP), and Equinix Inc (NASDAQ:EQIX). This group of stocks' market caps match ZTS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VMW,42,696435,15 ADP,49,1802478,3 REGN,49,1604372,7 CNI,28,2050472,2 CL,50,1699344,-3 SNP,10,168521,1 EQIX,49,2314147,-6 Average,39.6,1476538,2.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $1477 million. That figure was $1985 million in ZTS's case. Colgate-Palmolive Company (NYSE:CL) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zoetis Inc (NYSE:ZTS) is more popular among hedge funds. Our overall hedge fund sentiment score for ZTS is 82. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on ZTS as the stock returned 19.5% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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