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Hedge Funds Are Buying Quest Diagnostics Incorporated (DGX)

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Quest Diagnostics Incorporated (NYSE:DGX) and see how it was affected.

Quest Diagnostics Incorporated (NYSE:DGX) was in 33 hedge funds’ portfolios at the end of the third quarter of 2019. DGX shareholders have witnessed an increase in hedge fund interest recently. There were 24 hedge funds in our database with DGX holdings at the end of the previous quarter. Our calculations also showed that DGX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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.

YORK CAPITAL MANAGEMENT

James Dinan of York Capital Management

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 check out the recent hedge fund action regarding Quest Diagnostics Incorporated (NYSE:DGX).

What have hedge funds been doing with Quest Diagnostics Incorporated (NYSE:DGX)?

At Q3’s end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DGX over the last 17 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

DGX_dec2019

Among these funds, Marshall Wace held the most valuable stake in Quest Diagnostics Incorporated (NYSE:DGX), which was worth $82.2 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $63.9 million worth of shares. Two Sigma Advisors, Polaris Capital 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 Tamarack Capital Management allocated the biggest weight to Quest Diagnostics Incorporated (NYSE:DGX), around 4.88% of its portfolio. MD Sass is also relatively very bullish on the stock, designating 3.89 percent of its 13F equity portfolio to DGX.

As industrywide interest jumped, key hedge funds have been driving this bullishness. MD Sass, managed by Martin D. Sass, assembled the largest position in Quest Diagnostics Incorporated (NYSE:DGX). MD Sass had $16.5 million invested in the company at the end of the quarter. James Dinan’s York Capital Management also initiated a $12.7 million position during the quarter. The other funds with brand new DGX positions are Renaissance Technologies, Benjamin A. Smith’s Laurion Capital Management, and Jeffrey Talpins’s Element Capital Management.

Let’s check out hedge fund activity in other stocks similar to Quest Diagnostics Incorporated (NYSE:DGX). These stocks are SK Telecom Co., Ltd. (NYSE:SKM), Pinterest, Inc. (NYSE:PINS), Xylem Inc (NYSE:XYL), and Discovery, Inc. (NASDAQ:DISCA). This group of stocks’ market caps match DGX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SKM 6 42756 -1
PINS 31 980235 0
XYL 19 524367 0
DISCA 26 418972 2
Average 20.5 491583 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $492 million. That figure was $561 million in DGX’s case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Quest Diagnostics Incorporated (NYSE:DGX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DGX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DGX were disappointed as the stock returned 0.1% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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

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