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Hedge Funds Are Trimming McKesson Corporation (MCK) Bets

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded McKesson Corporation (NYSE:MCK) and determine whether the smart money was really smart about this stock.

McKesson Corporation (NYSE:MCK) shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. McKesson Corporation (NYSE:MCK) was in 61 hedge funds’ portfolios at the end of June. The all time high for this statistics is 68. Our calculations also showed that MCK isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s view the fresh hedge fund action regarding McKesson Corporation (NYSE:MCK).

How are hedge funds trading McKesson Corporation (NYSE:MCK)?

At the end of the second quarter, a total of 61 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MCK over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Pzena Investment Management held the most valuable stake in McKesson Corporation (NYSE:MCK), which was worth $459.7 million at the end of the third quarter. On the second spot was Baupost Group which amassed $256.1 million worth of shares. AQR Capital Management, Glenview Capital, and Citadel Investment Group 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 Tavio Capital allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 20.25% of its 13F portfolio. Glenview Capital is also relatively very bullish on the stock, setting aside 5.15 percent of its 13F equity portfolio to MCK.

Seeing as McKesson Corporation (NYSE:MCK) has witnessed a decline in interest from the aggregate hedge fund industry, we can see that there were a few hedgies that slashed their positions entirely last quarter. Interestingly, Benjamin A. Smith’s Laurion Capital Management cut the largest stake of all the hedgies monitored by Insider Monkey, valued at an estimated $40.4 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also said goodbye to its stock, about $19.6 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 2 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as McKesson Corporation (NYSE:MCK) but similarly valued. These stocks are Public Service Enterprise Group Incorporated (NYSE:PEG), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Credit Suisse Group AG (NYSE:CS), Nokia Corporation (NYSE:NOK), Zimmer Biomet Holdings Inc (NYSE:ZBH), Rockwell Automation Inc. (NYSE:ROK), and Waste Connections, Inc. (NYSE:WCN). This group of stocks’ market valuations are similar to MCK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PEG 31 649382 -3
ALXN 57 3577628 1
CS 14 134420 3
NOK 26 218711 3
ZBH 62 752893 11
ROK 50 546946 13
WCN 39 720610 6
Average 39.9 942941 4.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.9 hedge funds with bullish positions and the average amount invested in these stocks was $943 million. That figure was $1959 million in MCK’s case. Zimmer Biomet Holdings Inc (NYSE:ZBH) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 14 bullish hedge fund positions. McKesson Corporation (NYSE:MCK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MCK is 78.9. 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. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately MCK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MCK were disappointed as the stock returned -2.5% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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