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Zoetis Inc (ZTS) Tumbles After Acquisition Rumors Prove To Be Unfounded

Insider Monkey got drawn into what is happening in the market with regards to Zoetis Inc (NYSE:ZTS) after The Wall Street Journal released a report that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) had made a move to acquire the animal health company. Zoetis was already performing well even before the news, trading at an all-time high, giving it a market capitalization of around $25 billion. However, the acquisition news gave the stock yet further impetus, with the expectation as with all mergers, that any deal would provide a healthy premium over the current share price. The news also came at a time when the market has been talking of a possible acquisition of the animal medicine maker. After the news, shares of Zoetis Inc rallied 11% to close at a high of $55.38 per share on Thursday. But that momentum couldn’t be sustained after CNBC’s David Faber poured cold water on the acquisition report, sending the stock down by 12% on Friday. Faber made the whole acquisition report appear like a simple courtesy call and that Valeant isn’t seriously planning on an acquisition. Nonetheless, whether Valeant Pharmaceuticals International goes ahead with the acquisition plans or not, Zoetis Inc might still get suitors, and it won’t come cheap for a company sporting a P/E ratio of 25.8 and market capitalization of more than $20 billion. Other entities that could be potential suitors are Eli Lilly and Co (NYSE:LLY), Bayer, and Merck & Co., Inc. (NYSE:MRK).

Zoetis ZTS

Because of the acquisition potential as well as the strong fundamentals of the company, we’ve seen increasing interest from the smart money in Zoetis. A total of 66 of the hedge funds tracked by Insider Monkey held long positions in this stock at the end of the first quarter, a change of 8% from the end of the fourth quarter. The total value of their investments also increased to $4.04 billion from $3.63 billion during the first quarter.

Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 84 percentage points since the end of August 2012 when this system went live, returning a cumulative 142% vs. less than 58% for the S&P 500 Index (read the details).

Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. In terms of Zoetis, there has not been any insider activity of any kind so far in 2015.

Let’s take a glance at the recent hedge fund action surrounding Zoetis Inc (NYSE:ZTS).

How have hedgies been trading Zoetis Inc (NYSE:ZTS)?

When looking at the hedgies followed by Insider Monkey, Pershing Square, managed by Bill Ackman, holds the largest position in Zoetis Inc (NYSE:ZTS). Pershing Square has a $1.94 billion position in the stock, comprising 12.9% of its 13F portfolio. The second-most bullish hedge fund manager is York Capital Management, led by billionaire James Dinan, holding a $207.3 million position; 1.4% of its 13F portfolio is allocated to the company. Some other peers that hold long positions consist of Scott Ferguson’s Sachem Head Capital, Paul Marshall and Ian Wace’s Marshall Wace LLP, and George Soros’ Soros Fund Management.

As industrywide interest jumped, specific money managers have jumped into Zoetis Inc (NYSE:ZTS) headfirst. Alyeska Investment Group, managed by Anand Parekh, established the largest new position in Zoetis Inc (NYSE:ZTS) during the quarter. Alyeska Investment Group had $13 million invested in the company at the end of the quarter. Sander Gerber’s Hudson Bay Capital Management also initiated an $11.7 million position during the quarter. The other funds with brand new ZTS positions are John Segrich and Michael Molnar‘s Lorem Ipsum Management, Douglas Hirsch’s Seneca Capital, and Gordy Holterman and Derek Dunn’s Overland Advisors.

Overall hedge fund sentiment is sending a buy signal for Zoetis shares, and with those shares down by 3% last week as an overreaction swing down against the acquisition rumors proving false, we believe there’s a nice little window at this time to grab shares.

Disclosure: None

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