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Do Hedge Funds Really Love Zoetis Inc (ZTS)?

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 26.2% through November 22nd (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 34.7% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Zoetis Inc (NYSE:ZTS).

Zoetis Inc (NYSE:ZTS) investors should be aware of an increase in hedge fund interest lately. ZTS was in 46 hedge funds’ portfolios at the end of September. There were 40 hedge funds in our database with ZTS positions at the end of the previous quarter. Our calculations also showed that ZTS isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the latest hedge fund action regarding Zoetis Inc (NYSE:ZTS).

What does smart money think about Zoetis Inc (NYSE:ZTS)?

At the end of the third quarter, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ZTS over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ZTS Positions

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, William von Mueffling’s Cantillon Capital Management has the number one position in Zoetis Inc (NYSE:ZTS), worth close to $459.3 million, comprising 4.5% of its total 13F portfolio. The second largest stake is held by Renaissance Technologies which holds a $274.2 million position; 0.2% of its 13F portfolio is allocated to the company. Other professional money managers that are bullish encompass Paul Marshall and Ian Wace’s Marshall Wace, Israel Englander’s Millennium Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Banbury Partners allocated the biggest weight to Zoetis Inc (NYSE:ZTS), around 8.5% of its portfolio. Harvest Capital Strategies is also relatively very bullish on the stock, designating 6.43 percent of its 13F equity portfolio to ZTS.

There weren’t any hedge funds initiating brand new positions in the stock during the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Zoetis Inc (NYSE:ZTS). These stocks are Vale SA (NYSE:VALE), The Blackstone Group Inc. (NYSE:BX), Crown Castle International Corp. (REIT) (NYSE:CCI), and CIGNA Corporation (NYSE:CI). All of these stocks’ market caps match ZTS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VALE 28 1453835 7
BX 41 1571733 11
CCI 34 1849678 1
CI 62 3080624 14
Average 41.25 1988968 8.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.25 hedge funds with bullish positions and the average amount invested in these stocks was $1989 million. That figure was $2229 million in ZTS’s case. CIGNA Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Vale SA (NYSE:VALE) is the least popular one with only 28 bullish hedge fund positions. Zoetis Inc (NYSE:ZTS) 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 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately ZTS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ZTS were disappointed as the stock returned -3.7% during the fourth quarter (through 11/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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