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Were Hedge Funds Right About Zimmer Biomet Holdings Inc (ZBH)?

Reymerlyn Martin

Zimmer Biomet Holdings Inc (NYSE:ZBH) investors should be aware of a decrease in hedge fund sentiment in recent months. Zimmer Biomet Holdings Inc (ZBH) was in 36 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 40 hedge funds in our database with ZBH positions at the end of the previous quarter. Our calculations also showed that ZBH isn't among the 30 most popular stocks among hedge funds.

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 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Michael Castor of Sio Capital

We're going to review the recent hedge fund action regarding Zimmer Biomet Holdings Inc (NYSE:ZBH).

What does the smart money think about Zimmer Biomet Holdings Inc (NYSE:ZBH)?

Heading into the first quarter of 2019, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZBH over the last 14 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

ZBH_mar2019

Among these funds, JANA Partners held the most valuable stake in Zimmer Biomet Holdings Inc (NYSE:ZBH), which was worth $237.4 million at the end of the third quarter. On the second spot was Healthcor Management LP which amassed $214.5 million worth of shares. Moreover, Ariel Investments, D E Shaw, and Partner Fund Management were also bullish on Zimmer Biomet Holdings Inc (NYSE:ZBH), allocating a large percentage of their portfolios to this stock.

Because Zimmer Biomet Holdings Inc (NYSE:ZBH) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedgies who were dropping their positions entirely by the end of the third quarter. Interestingly, Israel Englander's Millennium Management dumped the biggest investment of the 700 funds monitored by Insider Monkey, valued at an estimated $171.7 million in stock. Roberto Mignone's fund, Bridger Management, also sold off its stock, about $92.7 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Zimmer Biomet Holdings Inc (NYSE:ZBH) but similarly valued. We will take a look at Lam Research Corporation (NASDAQ:LRCX), AutoZone, Inc. (NYSE:AZO), ArcelorMittal (NYSE:MT), and Ventas, Inc. (NYSE:VTR). This group of stocks' market values match ZBH's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LRCX,36,862903,2 AZO,40,1625815,10 MT,13,209696,-1 VTR,14,284947,-1 Average,25.75,745840,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $746 million. That figure was $1038 million in ZBH's case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 13 bullish hedge fund positions. Zimmer Biomet Holdings Inc (NYSE:ZBH) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on ZBH as the stock returned 21.4% and outperformed the market as well.

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

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