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Novartis AG (NVS) vs. Top 20 Hedge Fund Stocks in 2019

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Novartis AG (NYSE:NVS).

Is Novartis AG (NYSE:NVS) the right pick for your portfolio? The best stock pickers are taking a pessimistic view. The number of bullish hedge fund positions dropped by 2 recently. Our calculations also showed that NVS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 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.

Ken Fisher FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind we’re going to take a look at the recent hedge fund action surrounding Novartis AG (NYSE:NVS).

How are hedge funds trading Novartis AG (NYSE:NVS)?

At Q3’s end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards NVS over the last 17 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of Novartis AG (NYSE:NVS), with a stake worth $722.6 million reported as of the end of September. Trailing Fisher Asset Management was Renaissance Technologies, which amassed a stake valued at $452.3 million. Arrowstreet Capital, Partner Fund Management, and Point72 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 Bourgeon Capital allocated the biggest weight to Novartis AG (NYSE:NVS), around 2.66% of its 13F portfolio. Sectoral Asset Management is also relatively very bullish on the stock, designating 2.22 percent of its 13F equity portfolio to NVS.

Judging by the fact that Novartis AG (NYSE:NVS) has faced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds who were dropping their full holdings in the third quarter. It’s worth mentioning that Robert Pohly’s Samlyn Capital dropped the largest stake of all the hedgies watched by Insider Monkey, valued at about $39.5 million in call options. Israel Englander’s fund, Millennium Management, also sold off its call options, about $36.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Novartis AG (NYSE:NVS) but similarly valued. We will take a look at Pfizer Inc. (NYSE:PFE), PepsiCo, Inc. (NASDAQ:PEP), Toyota Motor Corporation (NYSE:TM), and Anheuser-Busch InBev SA/NV (NYSE:BUD). This group of stocks’ market values resemble NVS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PFE 55 3767946 3
PEP 57 3744859 2
TM 11 243035 3
BUD 19 1800212 1
Average 35.5 2389013 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $2389 million. That figure was $1708 million in NVS’s case. PepsiCo, Inc. (NASDAQ:PEP) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 11 bullish hedge fund positions. Novartis AG (NYSE:NVS) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately NVS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NVS investors were disappointed as the stock returned 27.4% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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