Is Perrigo Company (PRGO) Another High Profile Starboard Failed Bet?

Is Perrigo Company (NASDAQ:PRGO) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Perrigo Company (NASDAQ:PRGO) a cheap investment today? Prominent investors are taking a bearish view. The number of long hedge fund positions shrunk by 6 in recent months. Our calculations also showed that PRGO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). PRGO was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. There were 21 hedge funds in our database with PRGO positions at the end of the previous quarter.
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.

Jeff Smith

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action regarding Perrigo Company (NASDAQ:PRGO).

What does smart money think about Perrigo Company (NASDAQ:PRGO)?

Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PRGO over the last 17 quarters. Perrigo used to be a hedge fund darling 4 years ago. As you can see from our graph, hedge fund sentiment towards the stock now sits at its all time low. As hedge funds are cashing out their chips, Perrigo’s shares are declining.

Is PRGO A Good Stock To Buy?

Among these funds, Starboard Value LP still held the most valuable stake in Perrigo Company (NASDAQ:PRGO), which was worth $229.1 million at the end of the third quarter. On the second spot was Camber Capital Management which amassed $95 million worth of shares. Diamond Hill Capital, Two Sigma Advisors, and Balyasny Asset 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 Starboard Value LP allocated the biggest weight to Perrigo Company (NASDAQ:PRGO), around 7.64% of its 13F portfolio. Camber Capital Management is also relatively very bullish on the stock, dishing out 5 percent of its 13F equity portfolio to PRGO.

Seeing as Perrigo Company (NASDAQ:PRGO) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of hedge funds that slashed their positions entirely heading into Q4. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace cut the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at close to $12.3 million in stock, and Kenneth Squire’s 13D Management was right behind this move, as the fund dumped about $9.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 6 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Perrigo Company (NASDAQ:PRGO). These stocks are ServiceMaster Global Holdings Inc (NYSE:SERV), AptarGroup, Inc. (NYSE:ATR), AngloGold Ashanti Limited (NYSE:AU), and BorgWarner Inc. (NYSE:BWA). All of these stocks’ market caps match PRGO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SERV 26 927792 -4
ATR 22 112361 2
AU 19 454469 3
BWA 22 718476 1
Average 22.25 553275 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $553 million. That figure was $454 million in PRGO’s case. ServiceMaster Global Holdings Inc (NYSE:SERV) is the most popular stock in this table. On the other hand AngloGold Ashanti Limited (NYSE:AU) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Perrigo Company (NASDAQ:PRGO) is even less popular than AU. Hedge funds dodged a bullet by taking a bearish stance towards PRGO. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately PRGO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PRGO investors were disappointed as the stock returned -8% during the fourth quarter (through the end of November) 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 so far in Q4.

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