Were Hedge Funds Right About McKesson (MCK)?

At Insider Monkey, we pore over the filings of nearly 887 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31st. In this article, we will use that wealth of knowledge to determine whether or not McKesson Corporation (NYSE:MCK) makes for a good investment right now.

McKesson Corporation (NYSE:MCK) was in 51 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 68. MCK investors should pay attention to a decrease in enthusiasm from smart money recently. There were 54 hedge funds in our database with MCK holdings at the end of September. Our calculations also showed that MCK isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 percentage points (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

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At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let’s take a look at the recent hedge fund action surrounding McKesson Corporation (NYSE:MCK).

Do Hedge Funds Think MCK Is A Good Stock To Buy Now?

At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the third quarter of 2020. The graph below displays the number of hedge funds with bullish position in MCK over the last 22 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Pzena Investment Management was the largest shareholder of McKesson Corporation (NYSE:MCK), with a stake worth $537.3 million reported as of the end of December. Trailing Pzena Investment Management was Glenview Capital, which amassed a stake valued at $203.1 million. AQR Capital Management, Millennium Management, and D E Shaw 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 HealthInvest Partners AB allocated the biggest weight to McKesson Corporation (NYSE:MCK), around 6.1% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, earmarking 5.86 percent of its 13F equity portfolio to MCK.

Since McKesson Corporation (NYSE:MCK) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there exists a select few hedgies that decided to sell off their positions entirely in the fourth quarter. It’s worth mentioning that Seth Klarman’s Baupost Group cut the biggest position of all the hedgies tracked by Insider Monkey, worth an estimated $248.6 million in stock, and Louis Bacon’s Moore Global Investments was right behind this move, as the fund dumped about $21.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 3 funds in the fourth quarter.

Let’s check out hedge fund activity in other stocks similar to McKesson Corporation (NYSE:MCK). We will take a look at AMETEK, Inc. (NYSE:AME), American Water Works Company, Inc. (NYSE:AWK), Discover Financial Services (NYSE:DFS), Southwest Airlines Co. (NYSE:LUV), Corning Incorporated (NYSE:GLW), Splunk Inc (NASDAQ:SPLK), and NatWest Group plc (NYSE:NWG). This group of stocks’ market values are similar to MCK’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AME 31 956468 -6
AWK 36 958304 5
DFS 43 729763 -4
LUV 55 757534 4
GLW 39 334973 3
SPLK 47 1036156 3
NWG 3 759 1
Average 36.3 681994 0.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.3 hedge funds with bullish positions and the average amount invested in these stocks was $682 million. That figure was $1768 million in MCK’s case. Southwest Airlines Co. (NYSE:LUV) is the most popular stock in this table. On the other hand NatWest Group plc (NYSE:NWG) is the least popular one with only 3 bullish hedge fund positions. McKesson Corporation (NYSE:MCK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MCK is 70.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 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 8.1% since the end of December (through 4/30) 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 since 2019.

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