Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Thermo Fisher Scientific Inc. (NYSE:TMO).
Is Thermo Fisher Scientific Inc. (NYSE:TMO) going to take off soon? Hedge funds are in an optimistic mood. The number of bullish hedge fund bets moved up by 1 lately. Our calculations also showed that TMO isn’t among the 30 most popular stocks among hedge funds. TMO was in 68 hedge funds’ portfolios at the end of March. There were 67 hedge funds in our database with TMO holdings at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
We’re going to analyze the latest hedge fund action surrounding Thermo Fisher Scientific Inc. (NYSE:TMO).
Hedge fund activity in Thermo Fisher Scientific Inc. (NYSE:TMO)
At the end of the first quarter, a total of 68 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 1% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TMO over the last 15 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Thermo Fisher Scientific Inc. (NYSE:TMO) was held by Generation Investment Management, which reported holding $696.7 million worth of stock at the end of March. It was followed by AQR Capital Management with a $418.1 million position. Other investors bullish on the company included Viking Global, Cantillon Capital Management, and Glenview Capital.
As aggregate interest increased, specific money managers were breaking ground themselves. Tiger Eye Capital, managed by Ben Gambill, initiated the most valuable position in Thermo Fisher Scientific Inc. (NYSE:TMO). Tiger Eye Capital had $17.8 million invested in the company at the end of the quarter. Mark Kingdon’s Kingdon Capital also initiated a $15.8 million position during the quarter. The following funds were also among the new TMO investors: Jay Genzer’s Thames Capital Management, Vishal Saluja and Pham Quang’s Endurant Capital Management, and Justin John Ferayorni’s Tamarack Capital Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Thermo Fisher Scientific Inc. (NYSE:TMO) but similarly valued. We will take a look at NVIDIA Corporation (NASDAQ:NVDA), Royal Bank of Canada (NYSE:RY), Altria Group Inc (NYSE:MO), and Costco Wholesale Corporation (NASDAQ:COST). This group of stocks’ market valuations are similar to TMO’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NVDA | 43 | 1595434 | 2 |
| RY | 17 | 552491 | 3 |
| MO | 36 | 823787 | -5 |
| COST | 44 | 3323751 | -4 |
| Average | 35 | 1573866 | -1 |
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 $1574 million. That figure was $4436 million in TMO’s case. Costco Wholesale Corporation (NASDAQ:COST) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Thermo Fisher Scientific Inc. (NYSE:TMO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately TMO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TMO were disappointed as the stock returned -2.1% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
