How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding McKesson Corporation (NYSE:MCK) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in McKesson Corporation (NYSE:MCK) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that MCK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Public Service Enterprise Group Incorporated (NYSE:PEG), Suncor Energy Inc. (NYSE:SU), and Arthur J. Gallagher & Co. (NYSE:AJG) to gather more data points.
Larry Robbins of Glenview Capital
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let’s take a look at the recent hedge fund action encompassing McKesson Corporation (NYSE:MCK).
Do Hedge Funds Think MCK Is A Good Stock To Buy Now?
At Q3’s end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2021. The graph below displays the number of hedge funds with bullish position in MCK over the last 25 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Richard S. Pzena’s Pzena Investment Management has the number one position in McKesson Corporation (NYSE:MCK), worth close to $594 million, accounting for 2.4% of its total 13F portfolio. Coming in second is Larry Robbins of Glenview Capital, with a $345.1 million position; the fund has 6.3% of its 13F portfolio invested in the stock. Other peers with similar optimism consist of Israel Englander’s Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Glenview Capital allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 6.32% of its 13F portfolio. Healthcor Management LP is also relatively very bullish on the stock, dishing out 3.81 percent of its 13F equity portfolio to MCK.
Seeing as McKesson Corporation (NYSE:MCK) has witnessed a decline in interest from hedge fund managers, logic holds that there were a few fund managers who sold off their full holdings last quarter. At the top of the heap, Michael Burry’s Scion Asset Management dropped the largest stake of the 750 funds monitored by Insider Monkey, totaling about $130.5 million in stock. Renaissance Technologies, also said goodbye to its stock, about $108.9 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to McKesson Corporation (NYSE:MCK). These stocks are Public Service Enterprise Group Incorporated (NYSE:PEG), Suncor Energy Inc. (NYSE:SU), Arthur J. Gallagher & Co. (NYSE:AJG), American Water Works Company, Inc. (NYSE:AWK), Nokia Corporation (NYSE:NOK), Phillips 66 (NYSE:PSX), and Liberty Broadband Corp (NASDAQ:LBRDA). This group of stocks’ market values are similar to MCK’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PEG | 26 | 518847 | 0 |
| SU | 32 | 1084858 | 0 |
| AJG | 32 | 1388489 | -8 |
| AWK | 28 | 1127944 | -2 |
| NOK | 22 | 388301 | -4 |
| PSX | 34 | 409385 | 8 |
| LBRDA | 24 | 885745 | -4 |
| Average | 28.3 | 829081 | -1.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $829 million. That figure was $2277 million in MCK’s case. Phillips 66 (NYSE:PSX) is the most popular stock in this table. On the other hand Nokia Corporation (NYSE:NOK) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks McKesson Corporation (NYSE:MCK) is more popular among hedge funds. Our overall hedge fund sentiment score for MCK is 77.5. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 29.6% in 2021 and managed to beat the market by another 3.6 percentage points. Hedge funds were also right about betting on MCK as the stock returned 29% since the end of September (through 1/31) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
