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Laboratory Corp. of America Holdings (LH): Are Hedge Funds Right About This Stock?

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 821 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 March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Laboratory Corp. of America Holdings (NYSE:LH) and determine whether the smart money was really smart about this stock.

Is Laboratory Corp. of America Holdings (NYSE:LH) the right investment to pursue these days? The smart money was reducing their bets on the stock. The number of bullish hedge fund bets went down by 8 in recent months. Our calculations also showed that LH isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LH was in 45 hedge funds’ portfolios at the end of March. There were 53 hedge funds in our database with LH holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BRIDGER MANAGEMENT

Roberto Mignone of Bridger Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s go over the recent hedge fund action surrounding Laboratory Corp. of America Holdings (NYSE:LH).

Hedge fund activity in Laboratory Corp. of America Holdings (NYSE:LH)

At Q1’s end, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the fourth quarter of 2019. By comparison, 39 hedge funds held shares or bullish call options in LH a year ago. 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, Melvin Capital Management held the most valuable stake in Laboratory Corp. of America Holdings (NYSE:LH), which was worth $324.9 million at the end of the third quarter. On the second spot was Iridian Asset Management which amassed $177.9 million worth of shares. Healthcor Management LP, Ariel Investments, and Wallace R. Weitz & Co. 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 Healthcor Management LP allocated the biggest weight to Laboratory Corp. of America Holdings (NYSE:LH), around 5.83% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, earmarking 5.32 percent of its 13F equity portfolio to LH.

Seeing as Laboratory Corp. of America Holdings (NYSE:LH) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedgies who sold off their full holdings in the first quarter. Intriguingly, Brandon Haley’s Holocene Advisors cut the largest investment of the 750 funds tracked by Insider Monkey, totaling about $35.2 million in stock, and Amy Mulderry’s Tavio Capital was right behind this move, as the fund cut about $29.9 million worth. These moves are interesting, as aggregate hedge fund interest fell by 8 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Laboratory Corp. of America Holdings (NYSE:LH). We will take a look at Cincinnati Financial Corporation (NASDAQ:CINF), Kansas City Southern (NYSE:KSU), International Paper Company (NYSE:IP), and Atmos Energy Corporation (NYSE:ATO). All of these stocks’ market caps are similar to LH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CINF 31 484343 0
KSU 45 524207 5
IP 29 242007 4
ATO 21 208767 -5
Average 31.5 364831 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $365 million. That figure was $1055 million in LH’s case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand Atmos Energy Corporation (NYSE:ATO) is the least popular one with only 21 bullish hedge fund positions. Laboratory Corp. of America Holdings (NYSE:LH) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on LH as the stock returned 31.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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