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Were Hedge Funds Right About Merck (MRK)?

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Asma UL Husna
·6 min read
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Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks initially suffered the most but many of these stocks delivered strong returns since November and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment towards Merck & Co., Inc. (NYSE:MRK) changed recently.

Merck & Co., Inc. (NYSE:MRK) shareholders have witnessed an increase in activity from the world's largest hedge funds recently. Merck & Co., Inc. (NYSE:MRK) was in 82 hedge funds' portfolios at the end of December. The all time high for this statistic is 84. Our calculations also showed that MRK 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here).

Prem Watsa of Fairfax Financial Holdings

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. Keeping this in mind we're going to take a peek at the key hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).

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

At fourth quarter's end, a total of 82 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the third quarter of 2020. The graph below displays the number of hedge funds with bullish position in MRK over the last 22 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the number one position in Merck & Co., Inc. (NYSE:MRK). Berkshire Hathaway has a $2.3475 billion position in the stock, comprising 0.9% of its 13F portfolio. The second most bullish fund manager is D E Shaw, led by D. E. Shaw, holding a $811.2 million position; 0.7% of its 13F portfolio is allocated to the stock. Remaining peers that are bullish consist of Ken Fisher's Fisher Asset Management, Cliff Asness's AQR Capital Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 10.43% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, earmarking 6.86 percent of its 13F equity portfolio to MRK.

As aggregate interest increased, some big names were leading the bulls' herd. Levin Easterly Partners, managed by John Murphy, created the biggest position in Merck & Co., Inc. (NYSE:MRK). Levin Easterly Partners had $26.7 million invested in the company at the end of the quarter. Prem Watsa's Fairfax Financial Holdings also made a $10.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Nicholas Bagnall's Te Ahumairangi Investment Management, Benjamin A. Smith's Laurion Capital Management, and Vishal Saluja and Pham Quang's Endurant Capital Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. We will take a look at ASML Holding N.V. (NASDAQ:ASML), PepsiCo, Inc. (NASDAQ:PEP), AT&T Inc. (NYSE:T), Pfizer Inc. (NYSE:PFE), salesforce.com, inc. (NYSE:CRM), Intel Corporation (NASDAQ:INTC), and Abbott Laboratories (NYSE:ABT). This group of stocks' market valuations are similar to MRK's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ASML,30,2976227,7 PEP,56,4288005,4 T,58,1045081,7 PFE,63,1848417,-3 CRM,97,10576035,-9 INTC,72,5578824,6 ABT,64,4303482,2 Average,62.9,4373724,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 62.9 hedge funds with bullish positions and the average amount invested in these stocks was $4374 million. That figure was $7171 million in MRK's case. salesforce.com, inc. (NYSE:CRM) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 30 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 75.1. 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 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 beat the market again by 0.9 percentage points. Unfortunately MRK wasn't nearly as popular as these 30 stocks and hedge funds that were betting on MRK were disappointed as the stock returned -4.2% 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 many of these stocks already outperformed the market since 2019.

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

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