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Were Hedge Funds Right About Betting On McKesson Corporation (MCK)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. 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 McKesson Corporation (NYSE:MCK) and determine whether the smart money was really smart about this stock.

McKesson Corporation (NYSE:MCK) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. MCK was in 63 hedge funds’ portfolios at the end of March. There were 51 hedge funds in our database with MCK positions at the end of the previous quarter. Our calculations also showed that MCK 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).

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 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 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.

BAUPOST GROUP Seth Klarman

Seth Klarman of Baupost Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. Keeping this in mind we’re going to view the new hedge fund action encompassing McKesson Corporation (NYSE:MCK).

Hedge fund activity in McKesson Corporation (NYSE:MCK)

Heading into the second quarter of 2020, a total of 63 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MCK over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in McKesson Corporation (NYSE:MCK) was held by Pzena Investment Management, which reported holding $466.3 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $417.8 million position. Other investors bullish on the company included Baupost Group, Glenview Capital, and Suvretta Capital Management. In terms of the portfolio weights assigned to each position Tavio Capital allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 23.06% of its 13F portfolio. Copernicus Capital Management is also relatively very bullish on the stock, earmarking 8.35 percent of its 13F equity portfolio to MCK.

With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Suvretta Capital Management, managed by Aaron Cowen, initiated the largest position in McKesson Corporation (NYSE:MCK). Suvretta Capital Management had $131.7 million invested in the company at the end of the quarter. Christopher James’s Partner Fund Management also made a $46.5 million investment in the stock during the quarter. The other funds with brand new MCK positions are Benjamin A. Smith’s Laurion Capital Management, James E. Flynn’s Deerfield Management, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s check out hedge fund activity in other stocks similar to McKesson Corporation (NYSE:MCK). These stocks are Sirius XM Holdings Inc (NASDAQ:SIRI), Southern Copper Corporation (NYSE:SCCO), Amphenol Corporation (NYSE:APH), and Dow Inc. (NYSE:DOW). This group of stocks’ market valuations match MCK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SIRI 36 1134756 5
SCCO 19 134406 -1
APH 42 604137 6
DOW 38 375922 4
Average 33.75 562305 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $562 million. That figure was $2074 million in MCK’s case. Amphenol Corporation (NYSE:APH) is the most popular stock in this table. On the other hand Southern Copper Corporation (NYSE:SCCO) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks McKesson Corporation (NYSE:MCK) is more popular among hedge funds. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 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 12.1% during the second quarter (through June 25th) 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 most of these stocks already outperformed the market in 2020.

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