Were Hedge Funds Right About Piling Into Cardinal Health, Inc. (CAH)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Cardinal Health, Inc. (NYSE:CAH) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Cardinal Health, Inc. (NYSE:CAH) worth your attention right now? The smart money was in an optimistic mood. The number of long hedge fund bets rose by 5 in recent months. Cardinal Health, Inc. (NYSE:CAH) was in 49 hedge funds’ portfolios at the end of June. The all time high for this statistics is 44. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CAH isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 44 hedge funds in our database with CAH positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 56 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a look at the recent hedge fund action regarding Cardinal Health, Inc. (NYSE:CAH).

What have hedge funds been doing with Cardinal Health, Inc. (NYSE:CAH)?

At the end of the second quarter, a total of 49 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in CAH a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Among these funds, Pzena Investment Management held the most valuable stake in Cardinal Health, Inc. (NYSE:CAH), which was worth $156.8 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $139.2 million worth of shares. GLG Partners, D E Shaw, and Renaissance Technologies 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 Healthcare Value Capital allocated the biggest weight to Cardinal Health, Inc. (NYSE:CAH), around 6.66% of its 13F portfolio. East Side Capital (RR Partners) is also relatively very bullish on the stock, earmarking 3.23 percent of its 13F equity portfolio to CAH.

Now, some big names were breaking ground themselves. Gotham Asset Management, managed by Joel Greenblatt, created the most outsized position in Cardinal Health, Inc. (NYSE:CAH). Gotham Asset Management had $7.5 million invested in the company at the end of the quarter. Michael Castor’s Sio Capital also initiated a $7 million position during the quarter. The other funds with brand new CAH positions are Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, Kerr Neilson’s Platinum Asset Management, and Minhua Zhang’s Weld Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Cardinal Health, Inc. (NYSE:CAH). We will take a look at Tractor Supply Company (NASDAQ:TSCO), CBRE Group, Inc. (NYSE:CBRE), BioNTech SE (NASDAQ:BNTX), The Cooper Companies, Inc. (NYSE:COO), Warner Music Group Corp. (NASDAQ:WMG), Campbell Soup Company (NYSE:CPB), and Essex Property Trust Inc (NYSE:ESS). This group of stocks’ market values are similar to CAH’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.6 hedge funds with bullish positions and the average amount invested in these stocks was $730 million. That figure was $957 million in CAH’s case. Tractor Supply Company (NASDAQ:TSCO) is the most popular stock in this table. On the other hand BioNTech SE (NASDAQ:BNTX) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Cardinal Health, Inc. (NYSE:CAH) is more popular among hedge funds. Our overall hedge fund sentiment score for CAH is 90. 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. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Unfortunately CAH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CAH were disappointed as the stock returned -4.5% since the end of the second quarter (through 10/23) 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.

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