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Were Hedge Funds Right About Johnson & Johnson (JNJ)?

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Asma UL Husna
·6 min read
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While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, 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 40,000 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 Johnson & Johnson (NYSE:JNJ).

Johnson & Johnson (NYSE:JNJ) investors should be aware of a decrease in support from the world's most elite money managers of late. Johnson & Johnson (NYSE:JNJ) was in 81 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 94. There were 82 hedge funds in our database with JNJ holdings at the end of September. Our calculations also showed that JNJ isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 124 percentage points since March 2017 (see the details here).

Donald Yacktman of Yacktman Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. Now let's go over the fresh hedge fund action regarding Johnson & Johnson (NYSE:JNJ).

Do Hedge Funds Think JNJ Is A Good Stock To Buy Now?

At the end of the fourth quarter, a total of 81 of the hedge funds tracked by Insider Monkey were long this stock, a change of -1% from the third quarter of 2020. Below, you can check out the change in hedge fund sentiment towards JNJ over the last 22 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, Fundsmith LLP held the most valuable stake in Johnson & Johnson (NYSE:JNJ), which was worth $1006.1 million at the end of the fourth quarter. On the second spot was Arrowstreet Capital which amassed $994 million worth of shares. AQR Capital Management, D E Shaw, and Yacktman Asset 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 Tri Locum Partners allocated the biggest weight to Johnson & Johnson (NYSE:JNJ), around 9.3% of its 13F portfolio. Moab Capital Partners is also relatively very bullish on the stock, setting aside 6.05 percent of its 13F equity portfolio to JNJ.

Due to the fact that Johnson & Johnson (NYSE:JNJ) has experienced declining sentiment from the smart money, logic holds that there exists a select few hedgies that elected to cut their entire stakes last quarter. Interestingly, Renaissance Technologies dumped the biggest position of all the hedgies followed by Insider Monkey, worth about $275.5 million in stock. Michael Castor's fund, Sio Capital, also cut its stock, about $17 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Johnson & Johnson (NYSE:JNJ) but similarly valued. We will take a look at Walmart Inc. (NYSE:WMT), JPMorgan Chase & Co. (NYSE:JPM), Mastercard Incorporated (NYSE:MA), The Procter & Gamble Company (NYSE:PG), UnitedHealth Group Inc. (NYSE:UNH), The Walt Disney Company (NYSE:DIS), and NVIDIA Corporation (NASDAQ:NVDA). This group of stocks' market values are similar to JNJ's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WMT,70,6197019,1 JPM,112,6967178,-6 MA,154,17978734,21 PG,83,10421985,8 UNH,91,10778450,2 DIS,144,16417240,32 NVDA,88,8692203,6 Average,106,11064687,9.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 106 hedge funds with bullish positions and the average amount invested in these stocks was $11065 million. That figure was $5821 million in JNJ's case. Mastercard Incorporated (NYSE:MA) is the most popular stock in this table. On the other hand Walmart Inc. (NYSE:WMT) is the least popular one with only 70 bullish hedge fund positions. Johnson & Johnson (NYSE:JNJ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for JNJ is 36.4. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and surpassed the market again by 0.9 percentage points. Unfortunately JNJ wasn't nearly as popular as these 30 stocks (hedge fund sentiment was quite bearish); JNJ investors were disappointed as the stock returned 4% since the end of December (through 4/19) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 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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