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Were Hedge Funds Right About Zoetis Inc (ZTS)?

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 Zoetis Inc (NYSE:ZTS) and determine whether hedge funds had an edge regarding this stock.

Zoetis Inc (NYSE:ZTS) has seen an increase in hedge fund sentiment lately. ZTS was in 60 hedge funds’ portfolios at the end of March. There were 48 hedge funds in our database with ZTS positions at the end of the previous quarter. Our calculations also showed that ZTS 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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. Keeping this in mind we’re going to take a look at the recent hedge fund action encompassing Zoetis Inc (NYSE:ZTS).

What does smart money think about Zoetis Inc (NYSE:ZTS)?

At the end of the first quarter, a total of 60 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ZTS over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ZTS A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Cantillon Capital Management, managed by William von Mueffling, holds the most valuable position in Zoetis Inc (NYSE:ZTS). Cantillon Capital Management has a $344.1 million position in the stock, comprising 3.8% of its 13F portfolio. Sitting at the No. 2 spot is Paul Marshall and Ian Wace of Marshall Wace LLP, with a $201.3 million position; the fund has 2% of its 13F portfolio invested in the stock. Some other peers with similar optimism comprise Renaissance Technologies, Nicolai Tangen’s Ako Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Marlowe Partners allocated the biggest weight to Zoetis Inc (NYSE:ZTS), around 7.41% of its 13F portfolio. Thames Capital Management is also relatively very bullish on the stock, earmarking 6.36 percent of its 13F equity portfolio to ZTS.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in Zoetis Inc (NYSE:ZTS). Arrowstreet Capital had $39.2 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $12.3 million position during the quarter. The other funds with brand new ZTS positions are David Steinberg and Eric Udoff’s Marlowe Partners, Ben Gambill’s Tiger Eye Capital, and Michael Rockefeller and KarláKroeker’s Woodline Partners.

Let’s now take a look at hedge fund activity in other stocks similar to Zoetis Inc (NYSE:ZTS). These stocks are Canadian National Railway Company (NYSE:CNI), Booking Holdings Inc. (NASDAQ:BKNG), Biogen Inc. (NASDAQ:BIIB), and The Blackstone Group Inc. (NYSE:BX). All of these stocks’ market caps are similar to ZTS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNI 26 1605797 -3
BKNG 90 4914673 16
BIIB 70 4497544 9
BX 49 1523046 2
Average 58.75 3135265 6

View table here if you experience formatting issues.

As you can see these stocks had an average of 58.75 hedge funds with bullish positions and the average amount invested in these stocks was $3135 million. That figure was $1776 million in ZTS’s case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand Canadian National Railway Company (NYSE:CNI) is the least popular one with only 26 bullish hedge fund positions. Zoetis Inc (NYSE:ZTS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 but beat the market by 15.5 percentage points. Unfortunately ZTS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZTS were disappointed as the stock returned 16.6% during the same time period 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 many of these stocks already outperformed the market so far this year.

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