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Were Hedge Funds Right About Merck & Co., Inc. (MRK)?

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 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the fourth quarter, which unveil their equity positions as of December 31. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Merck & Co., Inc. (NYSE:MRK).

Is Merck & Co., Inc. (NYSE:MRK) ready to rally soon? Money managers are turning less bullish. The number of long hedge fund positions dropped by 3 lately. Our calculations also showed that MRK 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).

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Michael Castor of Sio Capital

Michael Castor of Sio Capital

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. 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. With all of this in mind let’s take a peek at the latest hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).

Hedge fund activity in Merck & Co., Inc. (NYSE:MRK)

At the end of the fourth quarter, a total of 77 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. By comparison, 68 hedge funds held shares or bullish call options in MRK a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the largest position in Merck & Co., Inc. (NYSE:MRK). Arrowstreet Capital has a $928.5 million position in the stock, comprising 2.2% of its 13F portfolio. The second largest stake is held by Fisher Asset Management, managed by Ken Fisher, which holds a $808.5 million position; 0.8% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism comprise Cliff Asness’s AQR Capital Management, Renaissance Technologies and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 11.45% of its 13F portfolio. Parkman Healthcare Partners is also relatively very bullish on the stock, earmarking 5.78 percent of its 13F equity portfolio to MRK.

Seeing as Merck & Co., Inc. (NYSE:MRK) has experienced falling interest from the entirety of the hedge funds we track, we can see that there were a few fund managers that decided to sell off their entire stakes heading into Q4. It’s worth mentioning that Jacob Mitchell’s Antipodes Partners dropped the largest investment of the 750 funds monitored by Insider Monkey, totaling about $148.9 million in stock. Ernest Chow and Jonathan Howe’s fund, Sensato Capital Management, also dumped its stock, about $12.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 3 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. These stocks are Chevron Corporation (NYSE:CVX), Wells Fargo & Company (NYSE:WFC), Pfizer Inc. (NYSE:PFE), and Novartis AG (NYSE:NVS). This group of stocks’ market caps are similar to MRK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CVX 47 2391610 -6
WFC 79 23878918 12
PFE 62 4838507 4
NVS 30 2054513 2
Average 54.5 8290887 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 54.5 hedge funds with bullish positions and the average amount invested in these stocks was $8291 million. That figure was $5164 million in MRK’s case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 30 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) 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 MRK, though not to the same extent, as the stock returned -7.9% during the first four months of 2020 (through April 20th) and outperformed the market as well.
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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