Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about CVS Caremark Corporation (NYSE:CVS) and compare its performance to hedge funds’ consensus picks in 2019.
CVS Caremark Corporation (NYSE:CVS) was in 47 hedge funds’ portfolios at the end of September. CVS has experienced a decrease in hedge fund interest recently. There were 55 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 Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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.
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the latest hedge fund action regarding CVS Caremark Corporation (NYSE:CVS).
How are hedge funds trading CVS Caremark Corporation (NYSE:CVS)?
At Q3’s end, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CVS 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.
Among these funds, Citadel Investment Group held the most valuable stake in CVS Caremark Corporation (NYSE:CVS), which was worth $192.3 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $99.2 million worth of shares. D E Shaw, Pzena Investment Management, and Millennium 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 Healthcare Value Capital allocated the biggest weight to CVS Caremark Corporation (NYSE:CVS), around 5.7% of its 13F portfolio. Bourgeon Capital is also relatively very bullish on the stock, designating 4.01 percent of its 13F equity portfolio to CVS.
Judging by the fact that CVS Caremark Corporation (NYSE:CVS) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedgies that elected to cut their positions entirely last quarter. Intriguingly, Matthew Tewksbury’s Stevens Capital Management dropped the biggest position of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $24.2 million in call options. Benjamin A. Smith’s fund, Laurion Capital Management, also dumped its call options, about $21.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 8 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to CVS Caremark Corporation (NYSE:CVS). We will take a look at Itau Unibanco Holding SA (NYSE:ITUB), Fidelity National Information Services Inc. (NYSE:FIS), Banco Santander (Brasil) SA (NYSE:BSBR), and Stryker Corporation (NYSE:SYK). This group of stocks’ market valuations resemble CVS’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.5 hedge funds with bullish positions and the average amount invested in these stocks was $2210 million. That figure was $925 million in CVS’s case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand Banco Santander (Brasil) SA (NYSE:BSBR) is the least popular one with only 14 bullish hedge fund positions. CVS Caremark Corporation (NYSE:CVS) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CVS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CVS were disappointed as the stock returned 17.4% in 2019 (through December 23rd) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.