Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's analyze whether Zoetis Inc (NYSE:ZTS) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Is Zoetis Inc (NYSE:ZTS) a buy right now? Hedge funds are getting less bullish. The number of long hedge fund positions shrunk by 5 in recent months. Our calculations also showed that ZTS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). ZTS was in 48 hedge funds' portfolios at the end of December. There were 53 hedge funds in our database with ZTS positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 41 percentage points since March 2017 (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 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_746893" align="aligncenter" width="400"] Paul Marshall of Marshall Wace[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's view the recent hedge fund action surrounding Zoetis Inc (NYSE:ZTS).
What does smart money think about Zoetis Inc (NYSE:ZTS)?
At the end of the fourth quarter, a total of 48 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 45 hedge funds with a bullish position in ZTS a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Cantillon Capital Management was the largest shareholder of Zoetis Inc (NYSE:ZTS), with a stake worth $442.2 million reported as of the end of September. Trailing Cantillon Capital Management was Marshall Wace LLP, which amassed a stake valued at $354 million. Renaissance Technologies, Ako Capital, and AQR Capital 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 Copernicus Capital Management allocated the biggest weight to Zoetis Inc (NYSE:ZTS), around 5.26% of its 13F portfolio. Intermede Investment Partners is also relatively very bullish on the stock, earmarking 5.08 percent of its 13F equity portfolio to ZTS.
Judging by the fact that Zoetis Inc (NYSE:ZTS) has experienced declining sentiment from hedge fund managers, logic holds that there exists a select few hedgies that slashed their positions entirely last quarter. Intriguingly, Nicolai Tangen's Ako Capital dumped the largest investment of the 750 funds watched by Insider Monkey, totaling close to $95.1 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dumped its stock, about $55.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Zoetis Inc (NYSE:ZTS). We will take a look at Boston Scientific Corporation (NYSE:BSX), Allergan plc (NYSE:AGN), VMware, Inc. (NYSE:VMW), and Takeda Pharmaceutical Company Limited (NYSE:TAK). This group of stocks' market valuations match ZTS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BSX,54,3207627,2 AGN,86,9927657,2 VMW,33,777041,-4 TAK,28,1186486,-3 Average,50.25,3774703,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 50.25 hedge funds with bullish positions and the average amount invested in these stocks was $3775 million. That figure was $2230 million in ZTS's case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 28 bullish hedge fund positions. Zoetis Inc (NYSE:ZTS) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on ZTS as the stock returned -1.4% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.