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Were Hedge Funds Right About AstraZeneca plc (AZN)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding AstraZeneca plc (NYSE:AZN).

Is AstraZeneca plc (NYSE:AZN) an attractive stock to buy now? Money managers are buying. The number of bullish hedge fund bets advanced by 4 in recent months. Our calculations also showed that AZN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

Kamran Moghtaderi of Eversept Partners

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the key hedge fund action regarding AstraZeneca plc (NYSE:AZN).

What have hedge funds been doing with AstraZeneca plc (NYSE:AZN)?

Heading into the first quarter of 2020, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in AZN a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Fisher Asset Management held the most valuable stake in AstraZeneca plc (NYSE:AZN), which was worth $816.2 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $430.2 million worth of shares. GQG Partners, Marshall Wace LLP, and Renaissance Technologies 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 Ariose Capital allocated the biggest weight to AstraZeneca plc (NYSE:AZN), around 12.56% of its 13F portfolio. Galibier Capital Management is also relatively very bullish on the stock, dishing out 5.66 percent of its 13F equity portfolio to AZN.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Ariose Capital, managed by Yi Xin, established the most valuable position in AstraZeneca plc (NYSE:AZN). Ariose Capital had $8.6 million invested in the company at the end of the quarter. Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management also made a $7.9 million investment in the stock during the quarter. The other funds with brand new AZN positions are Kamran Moghtaderi’s Eversept Partners, Samuel Isaly’s OrbiMed Advisors, and Philip Hempleman’s Ardsley Partners.

Let’s check out hedge fund activity in other stocks similar to AstraZeneca plc (NYSE:AZN). These stocks are Thermo Fisher Scientific Inc. (NYSE:TMO), Costco Wholesale Corporation (NASDAQ:COST), Raytheon Technologies Corporation (NYSE:UTX), and BP plc (NYSE:BP). This group of stocks’ market caps are similar to AZN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TMO 73 3607687 3
COST 70 4401660 7
UTX 81 7021856 7
BP 40 1634365 1
Average 66 4166392 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 66 hedge funds with bullish positions and the average amount invested in these stocks was $4166 million. That figure was $1901 million in AZN’s case. Raytheon Technologies Corporation (NYSE:UTX) is the most popular stock in this table. On the other hand BP plc (NYSE:BP) is the least popular one with only 40 bullish hedge fund positions. Compared to these stocks AstraZeneca plc (NYSE:AZN) is even less popular than BP. Hedge funds clearly dropped the ball on AZN as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. A small number of hedge funds were also right about betting on AZN as the stock returned 6.1% during the same time period and outperformed the market by an even larger margin.
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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