Hedge Funds Are Optimistic About Merck & Co., Inc. (MRK)

We can judge whether Merck & Co., Inc. (NYSE:MRK) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Is Merck & Co., Inc. (NYSE:MRK) ready to rally soon? The best stock pickers are taking a bullish view. The number of long hedge fund bets rose by 3 lately. Our calculations also showed that MRK ranked 28th overall among the 30 most popular stocks among hedge funds (see the video below).
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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

We’re going to analyze the recent hedge fund action regarding Merck & Co., Inc. (NYSE:MRK).

How are hedge funds trading Merck & Co., Inc. (NYSE:MRK)?

Heading into the fourth quarter of 2019, a total of 73 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MRK 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.


More specifically, Fisher Asset Management was the largest shareholder of Merck & Co., Inc. (NYSE:MRK), with a stake worth $757.3 million reported as of the end of September. Trailing Fisher Asset Management was Arrowstreet Capital, which amassed a stake valued at $702 million. AQR Capital Management, Renaissance Technologies, and D E Shaw 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 Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 11.29% of its portfolio. Copernicus Capital Management is also relatively very bullish on the stock, earmarking 5.79 percent of its 13F equity portfolio to MRK.

As aggregate interest increased, some big names were leading the bulls’ herd. Laurion Capital Management, managed by Benjamin A. Smith, initiated the most valuable call position in Merck & Co., Inc. (NYSE:MRK). Laurion Capital Management had $43.4 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser’s Magnetar Capital also initiated a $18.4 million position during the quarter. The other funds with new positions in the stock are Steven Boyd’s Armistice Capital, Ken Heebner’s Capital Growth Management, and David Costen Haley’s HBK Investments.

Let’s go over hedge fund activity in other stocks similar to Merck & Co., Inc. (NYSE:MRK). We will take a look at The Boeing Company (NYSE:BA), Cisco Systems, Inc. (NASDAQ:CSCO), UnitedHealth Group Inc. (NYSE:UNH), and Comcast Corporation (NASDAQ:CMCSA). All of these stocks’ market caps are similar to MRK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BA 78 3964531 4
CSCO 58 4154237 3
UNH 77 5610847 9
CMCSA 82 6384615 -4
Average 73.75 5028558 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 73.75 hedge funds with bullish positions and the average amount invested in these stocks was $5029 million. That figure was $4568 million in MRK’s case. Comcast Corporation (NASDAQ:CMCSA) is the most popular stock in this table. On the other hand Cisco Systems, Inc. (NASDAQ:CSCO) is the least popular one with only 58 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 MRK wasn’t nearly as popular as these 20 stocks. MRK investors were disappointed as the stock returned 1.5% 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 70 percent of these stocks already outperformed the market in Q4.

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