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CVS Health Corporation (CVS): Were Hedge Funds Right About This Stock?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded CVS Health Corporation (NYSE:CVS) and determine whether the smart money was really smart about this stock.

CVS Health Corporation (NYSE:CVS) was in 71 hedge funds’ portfolios at the end of the first quarter of 2020. CVS shareholders have witnessed an increase in enthusiasm from smart money lately. There were 58 hedge funds in our database with CVS positions at the end of the previous quarter. Our calculations also showed that CVS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by 58 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 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.

Jeffrey Altman Owl Creek

Jeffrey Altman of Owl Creek Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to go over the latest hedge fund action encompassing CVS Health Corporation (NYSE:CVS).

What does smart money think about CVS Health Corporation (NYSE:CVS)?

At the end of the first quarter, a total of 71 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the fourth quarter of 2019. By comparison, 61 hedge funds held shares or bullish call options in CVS a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, D. E. Shaw’s D E Shaw has the number one position in CVS Health Corporation (NYSE:CVS), worth close to $237.4 million, accounting for 0.4% of its total 13F portfolio. The second most bullish fund manager is Masters Capital Management, managed by Mike Masters, which holds a $148.3 million call position; the fund has 17.2% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish contain Ken Griffin’s Citadel Investment Group, Phill Gross and Robert Atchinson’s Adage Capital Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Copernicus Capital Management allocated the biggest weight to CVS Health Corporation (NYSE:CVS), around 9.33% of its 13F portfolio. Rubric Capital Management is also relatively very bullish on the stock, earmarking 5.12 percent of its 13F equity portfolio to CVS.

Now, some big names were leading the bulls’ herd. Healthcor Management LP, managed by Arthur B Cohen and Joseph Healey, assembled the most valuable position in CVS Health Corporation (NYSE:CVS). Healthcor Management LP had $73.2 million invested in the company at the end of the quarter. Aaron Cowen’s Suvretta Capital Management also made a $64.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeffrey Altman’s Owl Creek Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and David Rosen’s Rubric Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to CVS Health Corporation (NYSE:CVS). We will take a look at QUALCOMM, Incorporated (NASDAQ:QCOM), Starbucks Corporation (NASDAQ:SBUX), The Toronto-Dominion Bank (NYSE:TD), and BHP Group (NYSE:BBL). This group of stocks’ market caps resemble CVS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
QCOM 60 1621172 -7
SBUX 68 3229437 2
TD 19 154160 2
BBL 21 802817 -3
Average 42 1451897 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 42 hedge funds with bullish positions and the average amount invested in these stocks was $1452 million. That figure was $1273 million in CVS’s case. Starbucks Corporation (NASDAQ:SBUX) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks CVS Health Corporation (NYSE:CVS) is more popular among hedge funds. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. Unfortunately CVS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CVS were disappointed as the stock returned 8.8% during the second quarter (through June 25th) 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 most of these stocks already outperformed the market in 2020.

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