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Were Hedge Funds Right About Danaher Corporation (DHR)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Danaher Corporation (NYSE:DHR) based on those filings.

Danaher Corporation (NYSE:DHR) was in 61 hedge funds’ portfolios at the end of the fourth quarter of 2019. DHR investors should be aware of a decrease in hedge fund interest recently. There were 62 hedge funds in our database with DHR positions at the end of the previous quarter. Our calculations also showed that DHR 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.

Third Point 2014 Q3 Investor Letter

Dan Loeb of Third Point

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. Federal Reserve and Central Banks all around world are printing money like there is no tomorrow, so we check out this this precious metals expert’s stock pick. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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. Now let’s take a peek at the key hedge fund action surrounding Danaher Corporation (NYSE:DHR).

What have hedge funds been doing with Danaher Corporation (NYSE:DHR)?

Heading into the first quarter of 2020, a total of 61 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the previous quarter. On the other hand, there were a total of 48 hedge funds with a bullish position in DHR a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Danaher Corporation (NYSE:DHR) was held by Third Point, which reported holding $569.4 million worth of stock at the end of September. It was followed by AQR Capital Management with a $298.3 million position. Other investors bullish on the company included Akre Capital Management, Impax Asset Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Third Point allocated the biggest weight to Danaher Corporation (NYSE:DHR), around 6.55% of its 13F portfolio. Eversept Partners is also relatively very bullish on the stock, earmarking 5.87 percent of its 13F equity portfolio to DHR.

Judging by the fact that Danaher Corporation (NYSE:DHR) has witnessed bearish sentiment from hedge fund managers, logic holds that there lies a certain “tier” of funds who sold off their entire stakes by the end of the third quarter. Intriguingly, Israel Englander’s Millennium Management sold off the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $114.9 million in stock, and Doug Silverman and Alexander Klabin’s Senator Investment Group was right behind this move, as the fund sold off about $86.7 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Danaher Corporation (NYSE:DHR). These stocks are Charter Communications, Inc. (NASDAQ:CHTR), Starbucks Corporation (NASDAQ:SBUX), Diageo plc (NYSE:DEO), and The Toronto-Dominion Bank (NYSE:TD). This group of stocks’ market caps are similar to DHR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHTR 65 9013923 -5
SBUX 66 5063838 7
DEO 17 794917 -5
TD 17 312660 0
Average 41.25 3796335 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.25 hedge funds with bullish positions and the average amount invested in these stocks was $3796 million. That figure was $2354 million in DHR’s case. Starbucks Corporation (NASDAQ:SBUX) is the most popular stock in this table. On the other hand Diageo plc (NYSE:DEO) is the least popular one with only 17 bullish hedge fund positions. Danaher Corporation (NYSE:DHR) is not the most popular stock in this group but hedge fund interest is still above average. 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 lost 1.0% in 2020 through April 20th but still beat the market by 11 percentage points. Hedge funds were also right about betting on DHR as the stock returned 1.7% in 2020 (through April 20th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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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