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Were Hedge Funds Right About Selling Abbott Laboratories (ABT)?

Abigail Fisher

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 86% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Abbott Laboratories (NYSE:ABT).

Abbott Laboratories (NYSE:ABT) has seen a decrease in hedge fund interest recently. ABT was in 51 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 53 hedge funds in our database with ABT holdings at the end of the previous quarter. Our calculations also showed that ABT isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross, Adage Capital Management

Let's go over the recent hedge fund action encompassing Abbott Laboratories (NYSE:ABT).

Hedge fund activity in Abbott Laboratories (NYSE:ABT)

At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the second quarter of 2018. By comparison, 51 hedge funds held shares or bullish call options in ABT a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

ABT_mar2019

Among these funds, Diamond Hill Capital held the most valuable stake in Abbott Laboratories (NYSE:ABT), which was worth $551.5 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $187.4 million worth of shares. Moreover, Citadel Investment Group, AQR Capital Management, and Sirios Capital Management were also bullish on Abbott Laboratories (NYSE:ABT), allocating a large percentage of their portfolios to this stock.

Because Abbott Laboratories (NYSE:ABT) has faced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there is a sect of fund managers that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, Mike Masters's Masters Capital Management said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, valued at an estimated $36.7 million in stock, and Sander Gerber's Hudson Bay Capital Management was right behind this move, as the fund sold off about $14.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 2 funds by the end of the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Abbott Laboratories (NYSE:ABT) but similarly valued. We will take a look at Amgen, Inc. (NASDAQ:AMGN), DowDuPont Inc. (NYSE:DWDP), Eli Lilly and Company (NYSE:LLY), and SAP SE (NYSE:SAP). This group of stocks' market valuations are closest to ABT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMGN,46,3086354,4 DWDP,67,3444105,-2 LLY,47,2100204,7 SAP,14,1337479,2 Average,43.5,2492036,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.5 hedge funds with bullish positions and the average amount invested in these stocks was $2492 million. That figure was $1634 million in ABT's case. DowDuPont Inc. (NYSE:DWDP) is the most popular stock in this table. On the other hand SAP SE (NYSE:SAP) is the least popular one with only 14 bullish hedge fund positions. Abbott Laboratories (NYSE:ABT) is not the most popular stock in this group but hedge fund interest is still above average. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately ABT wasn't in this group. Hedge funds that bet on ABT were disappointed as the stock returned 10.9% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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