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Were Hedge Funds Right About Thermo Fisher Scientific Inc. (TMO)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. Keeping this in mind, let’s analyze whether Thermo Fisher Scientific Inc. (NYSE:TMO) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Thermo Fisher Scientific Inc. (NYSE:TMO) investors should pay attention to an increase in support from the world’s most elite money managers of late. Our calculations also showed that TMO 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).

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 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 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.

David Blood

David Blood of Generation Investment Management

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 are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor’s coronavirus picks. 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. Now we’re going to take a gander at the recent hedge fund action surrounding Thermo Fisher Scientific Inc. (NYSE:TMO).

Hedge fund activity in Thermo Fisher Scientific Inc. (NYSE:TMO)

At Q4’s end, a total of 73 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TMO over the last 18 quarters. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Is TMO A Good Stock To Buy?

Among these funds, Generation Investment Management held the most valuable stake in Thermo Fisher Scientific Inc. (NYSE:TMO), which was worth $672.7 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $402.8 million worth of shares. Cantillon Capital Management, Egerton Capital Limited, and Marshall Wace LLP 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 Cryder Capital allocated the biggest weight to Thermo Fisher Scientific Inc. (NYSE:TMO), around 14.67% of its 13F portfolio. Steamboat Capital Partners is also relatively very bullish on the stock, earmarking 5.3 percent of its 13F equity portfolio to TMO.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Farallon Capital, initiated the most outsized position in Thermo Fisher Scientific Inc. (NYSE:TMO). Farallon Capital had $277.2 million invested in the company at the end of the quarter. Donald Sussman’s Paloma Partners also initiated a $4.5 million position during the quarter. The following funds were also among the new TMO investors: Steve Cohen’s Point72 Asset Management, Qing Li’s Sciencast Management, and Gordon W Malin’s Mountain Road Advisors.

Let’s now review hedge fund activity in other stocks similar to Thermo Fisher Scientific Inc. (NYSE:TMO). These stocks are Costco Wholesale Corporation (NASDAQ:COST), United Technologies Corporation (NYSE:UTX), BP plc (NYSE:BP), and Paypal Holdings Inc (NASDAQ:PYPL). All of these stocks’ market caps are similar to TMO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
COST 70 4401660 7
UTX 81 7021856 7
BP 40 1634365 1
PYPL 126 6225698 22
Average 79.25 4820895 9.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 79.25 hedge funds with bullish positions and the average amount invested in these stocks was $4821 million. That figure was $3608 million in TMO’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand BP plc (NYSE:BP) is the least popular one with only 40 bullish hedge fund positions. Thermo Fisher Scientific Inc. (NYSE:TMO) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on TMO as the stock returned 0.8% during the same time period and outperformed the market by an even larger margin.
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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