Were Hedge Funds Right About Ditching Zimmer Biomet Holdings Inc (ZBH)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Zimmer Biomet Holdings Inc (NYSE:ZBH) and determine whether hedge funds skillfully traded this stock.

Is Zimmer Biomet Holdings Inc (NYSE:ZBH) a bargain? Investors who are in the know were selling. The number of long hedge fund bets were cut by 13 in recent months. Our calculations also showed that ZBH 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.

In the financial world there are numerous methods stock traders employ to evaluate stocks. Two of the most underrated methods are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the top hedge fund managers can outpace the broader indices by a healthy margin (see the details here).

Arthur B Cohen and Joseph Healey of Healthcor Management 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 review the recent hedge fund action encompassing Zimmer Biomet Holdings Inc (NYSE:ZBH).

What have hedge funds been doing with Zimmer Biomet Holdings Inc (NYSE:ZBH)?

Heading into the second quarter of 2020, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ZBH over the last 18 quarters. 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, Healthcor Management LP held the most valuable stake in Zimmer Biomet Holdings Inc (NYSE:ZBH), which was worth $83.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $51.5 million worth of shares. Ariel Investments, D E Shaw, and Holocene Advisors 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 Tavio Capital allocated the biggest weight to Zimmer Biomet Holdings Inc (NYSE:ZBH), around 10.54% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, dishing out 4.96 percent of its 13F equity portfolio to ZBH.

Judging by the fact that Zimmer Biomet Holdings Inc (NYSE:ZBH) has witnessed falling interest from the smart money, it’s safe to say that there exists a select few funds that slashed their full holdings heading into Q4. Intriguingly, Roberto Mignone’s Bridger Management said goodbye to the biggest stake of the 750 funds watched by Insider Monkey, totaling about $88.2 million in stock, and Aaron Cowen’s Suvretta Capital Management was right behind this move, as the fund dumped about $68 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 13 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Zimmer Biomet Holdings Inc (NYSE:ZBH). These stocks are IQVIA Holdings, Inc. (NYSE:IQV), ZTO Express (Cayman) Inc. (NYSE:ZTO), AvalonBay Communities Inc (NYSE:AVB), and Prudential Financial Inc (NYSE:PRU). This group of stocks’ market caps are similar to ZBH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IQV 60 2473750 -4
ZTO 15 562997 1
AVB 30 377394 7
PRU 28 367179 -8
Average 33.25 945330 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $945 million. That figure was $621 million in ZBH’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 15 bullish hedge fund positions. Zimmer Biomet Holdings Inc (NYSE:ZBH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 but beat the market by 15.5 percentage points. Unfortunately ZBH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZBH were disappointed as the stock returned 18.3% during the same time period 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 many of these stocks already outperformed the market so far this year.

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