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Were Hedge Funds Right About Zimmer Biomet Holdings Inc (ZBH)?

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. Keeping this in mind let’s see whether Zimmer Biomet Holdings Inc (NYSE:ZBH) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Zimmer Biomet Holdings Inc (NYSE:ZBH) shareholders have witnessed an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that ZBH 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 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 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.

BRIDGER MANAGEMENT

Roberto Mignone of Bridger 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. Blockchain technology is about to go mainstream and reach heavy adoption, so we check out this tech investor’s blockchain stock pick. 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 we’re going to go over the new hedge fund action encompassing Zimmer Biomet Holdings Inc (NYSE:ZBH).

How are hedge funds trading Zimmer Biomet Holdings Inc (NYSE:ZBH)?

Heading into the first quarter of 2020, a total of 64 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 31% from the previous quarter. On the other hand, there were a total of 36 hedge funds with a bullish position in ZBH a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Balyasny Asset Management held the most valuable stake in Zimmer Biomet Holdings Inc (NYSE:ZBH), which was worth $113.4 million at the end of the third quarter. On the second spot was Millennium Management which amassed $95.8 million worth of shares. Holocene Advisors, Bridger Management, and Ariel Investments 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 Tavio Capital allocated the biggest weight to Zimmer Biomet Holdings Inc (NYSE:ZBH), around 16.06% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, designating 8.54 percent of its 13F equity portfolio to ZBH.

Consequently, specific money managers were breaking ground themselves. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, established the most outsized position in Zimmer Biomet Holdings Inc (NYSE:ZBH). Polar Capital had $61.7 million invested in the company at the end of the quarter. Kevin Molloy’s Iron Triangle Partners also initiated a $29.3 million position during the quarter. The other funds with brand new ZBH positions are Michael Rockefeller and Karl Kroeker’s Woodline Partners, Samuel Isaly’s OrbiMed Advisors, and Greg Martinez’s Parkman Healthcare Partners.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Zimmer Biomet Holdings Inc (NYSE:ZBH) but similarly valued. We will take a look at The Hershey Company (NYSE:HSY), Yum! Brands, Inc. (NYSE:YUM), Paychex, Inc. (NASDAQ:PAYX), and IHS Markit Ltd. (NYSE:INFO). This group of stocks’ market caps match ZBH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HSY 39 901147 3
YUM 36 462690 -3
PAYX 36 713174 4
INFO 29 729273 -1
Average 35 701571 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $702 million. That figure was $1444 million in ZBH’s case. The Hershey Company (NYSE:HSY) is the most popular stock in this table. On the other hand IHS Markit Ltd. (NYSE:INFO) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Zimmer Biomet Holdings Inc (NYSE:ZBH) is more popular among hedge funds. 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 and still beat the market by 11 percentage points. Unfortunately ZBH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZBH were disappointed as the stock returned -21.6% during the three months of 2020 (through April 20th) 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.
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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