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Were Hedge Funds Right About Quitting Philip Morris International Inc. (PM)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Philip Morris International Inc. (NYSE:PM) and determine whether hedge funds had an edge regarding this stock.

Philip Morris International Inc. (NYSE:PM) was in 48 hedge funds’ portfolios at the end of March. PM investors should be aware of a decrease in enthusiasm from smart money recently. There were 57 hedge funds in our database with PM positions at the end of the previous quarter. Our calculations also showed that PM 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BRIDGEWATER ASSOCIATES

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. With all of this in mind we’re going to go over the key hedge fund action surrounding Philip Morris International Inc. (NYSE:PM).

How have hedgies been trading Philip Morris International Inc. (NYSE:PM)?

At Q1’s end, a total of 48 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PM over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PM A Good Stock To Buy?

More specifically, Cedar Rock Capital was the largest shareholder of Philip Morris International Inc. (NYSE:PM), with a stake worth $675.2 million reported as of the end of September. Trailing Cedar Rock Capital was Gardner Russo & Gardner, which amassed a stake valued at $623.1 million. Ariel Investments, Diamond Hill Capital, and AQR Capital Management 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 Cedar Rock Capital allocated the biggest weight to Philip Morris International Inc. (NYSE:PM), around 18.07% of its 13F portfolio. Gardner Russo & Gardner is also relatively very bullish on the stock, designating 6.3 percent of its 13F equity portfolio to PM.

Since Philip Morris International Inc. (NYSE:PM) has experienced falling interest from the aggregate hedge fund industry, it’s easy to see that there exists a select few hedgies that elected to cut their positions entirely in the first quarter. Intriguingly, Steve Cohen’s Point72 Asset Management dumped the largest investment of all the hedgies tracked by Insider Monkey, valued at about $42 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also dumped its stock, about $8.4 million worth. These transactions are interesting, as total hedge fund interest fell by 9 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Philip Morris International Inc. (NYSE:PM) but similarly valued. These stocks are Thermo Fisher Scientific Inc. (NYSE:TMO), AbbVie Inc (NYSE:ABBV), Paypal Holdings Inc (NASDAQ:PYPL), and ASML Holding N.V. (NASDAQ:ASML). This group of stocks’ market values match PM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TMO 80 3187947 7
ABBV 81 5118264 10
PYPL 118 4659097 -8
ASML 30 1505012 8
Average 77.25 3617580 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 77.25 hedge funds with bullish positions and the average amount invested in these stocks was $3618 million. That figure was $2541 million in PM’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 30 bullish hedge fund positions. Philip Morris International Inc. (NYSE:PM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately PM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PM investors were disappointed as the stock returned -2.4% during the second quarter 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.

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