Were Hedge Funds Right About Betting On Zoetis Inc (ZTS)?

You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.

Zoetis Inc (NYSE:ZTS) was in 40 hedge funds’ portfolios at the end of the second quarter of 2019. ZTS has experienced an increase in hedge fund interest recently. There were 37 hedge funds in our database with ZTS holdings at the end of the previous quarter. Our calculations also showed that ZTS isn’t among the 30 most popular stocks among hedge funds.

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Marshall Marshall Wace

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a glance at the fresh hedge fund action regarding Zoetis Inc (NYSE:ZTS).

What does smart money think about Zoetis Inc (NYSE:ZTS)?

At Q2’s end, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. By comparison, 39 hedge funds held shares or bullish call options in ZTS 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.

No of Hedge Funds with ZTS Positions

Among these funds, Cantillon Capital Management held the most valuable stake in Zoetis Inc (NYSE:ZTS), which was worth $420.9 million at the end of the second quarter. On the second spot was Marshall Wace LLP which amassed $273.2 million worth of shares. Moreover, Renaissance Technologies, AQR Capital Management, and Millennium Management were also bullish on Zoetis Inc (NYSE:ZTS), allocating a large percentage of their portfolios to this stock.

Now, key hedge funds were leading the bulls’ herd. Point72 Asset Management, managed by Steve Cohen, created the largest position in Zoetis Inc (NYSE:ZTS). Point72 Asset Management had $22.4 million invested in the company at the end of the quarter. Lee Ainslie’s Maverick Capital also made a $8.6 million investment in the stock during the quarter. The following funds were also among the new ZTS investors: Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Minhua Zhang’s Weld Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Zoetis Inc (NYSE:ZTS) but similarly valued. These stocks are Illumina, Inc. (NASDAQ:ILMN), Schlumberger Limited (NYSE:SLB), The Charles Schwab Corporation (NYSE:SCHW), and ServiceNow Inc (NYSE:NOW). This group of stocks’ market valuations resemble ZTS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ILMN 43 1354306 1
SLB 41 1851257 -8
SCHW 48 2698349 -3
NOW 77 4250893 12
Average 52.25 2538701 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 52.25 hedge funds with bullish positions and the average amount invested in these stocks was $2539 million. That figure was $2061 million in ZTS’s case. ServiceNow Inc (NYSE:NOW) is the most popular stock in this table. On the other hand Schlumberger Limited (NYSE:SLB) is the least popular one with only 41 bullish hedge fund positions. Compared to these stocks Zoetis Inc (NYSE:ZTS) is even less popular than SLB. Hedge funds clearly dropped the ball on ZTS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks (see the video below) among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on ZTS as the stock returned 9.9% during the third quarter 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.