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Were Hedge Funds Right About Merck & Co., Inc. (MRK)?

Debasis Saha
·6 min read

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Merck & Co., Inc. (NYSE:MRK).

Merck & Co., Inc. (NYSE:MRK) has seen a decrease in hedge fund sentiment in recent months. Merck & Co., Inc. (NYSE:MRK) was in 76 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 84. Our calculations also showed that MRK 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.

In the 21st century investor’s toolkit there are several tools stock market investors can use to evaluate publicly traded companies. A duo of the most underrated tools are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the best picks of the best investment managers can outclass the market by a healthy margin (see the details here).

David Siegel of Two Sigma Advisors
David Siegel of Two Sigma Advisors

David Siegel of Two Sigma Advisors

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 we're going to analyze the latest hedge fund action surrounding Merck & Co., Inc. (NYSE:MRK).

How have hedgies been trading Merck & Co., Inc. (NYSE:MRK)?

At second quarter's end, a total of 76 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MRK over the last 20 quarters. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is MRK A Good Stock To Buy?
Is MRK A Good Stock To Buy?

The largest stake in Merck & Co., Inc. (NYSE:MRK) was held by Fisher Asset Management, which reported holding $703.9 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $668.8 million position. Other investors bullish on the company included D E Shaw, AQR Capital Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 12.09% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, setting aside 6.62 percent of its 13F equity portfolio to MRK.

Judging by the fact that Merck & Co., Inc. (NYSE:MRK) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few hedge funds that decided to sell off their entire stakes in the second quarter. Intriguingly, Michael Hintze's CQS Cayman LP dropped the largest position of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $21.5 million in stock. Richard Gerson and Navroz D. Udwadia's fund, Falcon Edge Capital, also sold off its stock, about $18.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds in the second quarter.

Let's now take a look at hedge fund activity in other stocks similar to Merck & Co., Inc. (NYSE:MRK). These stocks are The Coca-Cola Company (NYSE:KO), Exxon Mobil Corporation (NYSE:XOM), PepsiCo, Inc. (NYSE:PEP), Pfizer Inc. (NYSE:PFE), Comcast Corporation (NASDAQ:CMCSA), Toyota Motor Corporation (NYSE:TM), and AbbVie Inc (NYSE:ABBV). This group of stocks' market values match MRK's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KO,59,20093024,4 XOM,53,1114752,-12 PEP,53,3156792,-4 PFE,66,2139163,-1 CMCSA,80,7207135,-3 TM,13,719379,2 ABBV,89,6226917,8 Average,59,5808166,-0.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 59 hedge funds with bullish positions and the average amount invested in these stocks was $5808 million. That figure was $4854 million in MRK's case. AbbVie Inc (NYSE:ABBV) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 13 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MRK is 71.6. 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 positive signal but 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately MRK wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MRK were disappointed as the stock returned 4% since the end of June (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 many of these stocks already outperformed the market so far this year.

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

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