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Were Hedge Funds Right About Cerner Corporation (CERN) ?

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 Cerner Corporation (NASDAQ:CERN) and determine whether hedge funds had an edge regarding this stock.

Is Cerner Corporation (NASDAQ:CERN) a good investment today? The best stock pickers were becoming hopeful. The number of long hedge fund bets inched up by 7 in recent months. Our calculations also showed that CERN 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). CERN was in 41 hedge funds’ portfolios at the end of March. There were 34 hedge funds in our database with CERN 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.

Jeff Smith

Jeffrey Smith of Starboard Value LP

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. Now we’re going to go over the latest hedge fund action regarding Cerner Corporation (NASDAQ:CERN).

Hedge fund activity in Cerner Corporation (NASDAQ:CERN)

At the end of the first quarter, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CERN over the last 18 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Generation Investment Management, managed by David Blood and Al Gore, holds the biggest position in Cerner Corporation (NASDAQ:CERN). Generation Investment Management has a $328.4 million position in the stock, comprising 2.3% of its 13F portfolio. The second largest stake is held by Jeffrey Smith of Starboard Value LP, with a $218.9 million position; the fund has 8.9% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish encompass Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Israel Englander’s Millennium Management and Michael Blitzer’s Kingstown Capital Management. In terms of the portfolio weights assigned to each position Starboard Value LP allocated the biggest weight to Cerner Corporation (NASDAQ:CERN), around 8.87% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, earmarking 7.98 percent of its 13F equity portfolio to CERN.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Kingstown Capital Management, managed by Michael Blitzer, initiated the most valuable position in Cerner Corporation (NASDAQ:CERN). Kingstown Capital Management had $40.9 million invested in the company at the end of the quarter. Greg Poole’s Echo Street Capital Management also initiated a $14.9 million position during the quarter. The other funds with brand new CERN positions are Paul Tudor Jones’s Tudor Investment Corp, John Overdeck and David Siegel’s Two Sigma Advisors, and Greg Eisner’s Engineers Gate Manager.

Let’s now review hedge fund activity in other stocks similar to Cerner Corporation (NASDAQ:CERN). We will take a look at Barclays PLC (NYSE:BCS), Archer Daniels Midland Company (NYSE:ADM), Ecopetrol S.A. (NYSE:EC), and Liberty Broadband Corp (NASDAQ:LBRDA). This group of stocks’ market values are similar to CERN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BCS 13 33314 2
ADM 32 563664 4
EC 12 107803 1
LBRDA 26 655556 2
Average 20.75 340084 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $340 million. That figure was $1006 million in CERN’s case. Archer Daniels Midland Company (NYSE:ADM) is the most popular stock in this table. On the other hand Ecopetrol S.A. (NYSE:EC) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Cerner Corporation (NASDAQ:CERN) 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately CERN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CERN were disappointed as the stock returned 9.4% during the second quarter 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.