Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Merck & Co., Inc. (NYSE:MRK).
Merck & Co., Inc. (NYSE:MRK) was in 80 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 84. MRK investors should pay attention to an increase in hedge fund interest of late. There were 76 hedge funds in our database with MRK positions at the end of the second quarter. Our calculations also showed that MRK isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
At the moment there are numerous tools market participants can use to assess stocks. Two of the most useful tools are hedge fund and insider trading activity. Our researchers have shown that, historically, those who follow the best picks of the best investment managers can beat the S&P 500 by a solid amount (see the details here).
Robert Pohly of Samlyn Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).
Hedge fund activity in Merck & Co., Inc. (NYSE:MRK)
At Q3’s end, a total of 80 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards MRK over the last 21 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 Merck & Co., Inc. (NYSE:MRK) was held by Berkshire Hathaway, which reported holding $1858.3 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $769.6 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 12.62% of its 13F portfolio. Sphera Global Healthcare Fund is also relatively very bullish on the stock, setting aside 7.2 percent of its 13F equity portfolio to MRK.
As one would reasonably expect, some big names have jumped into Merck & Co., Inc. (NYSE:MRK) headfirst. Berkshire Hathaway, managed by Warren Buffett, created the largest position in Merck & Co., Inc. (NYSE:MRK). Berkshire Hathaway had $1.8583 billion invested in the company at the end of the quarter. Robert Pohly’s Samlyn Capital also made a $97.6 million investment in the stock during the quarter. The other funds with brand new MRK positions are Zach Schreiber’s Point State Capital, Roberto Mignone’s Bridger Management, and Mark Kingdon’s Kingdon Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. We will take a look at Bank of America Corporation (NYSE:BAC), Pfizer Inc. (NYSE:PFE), AT&T Inc. (NYSE:T), Novartis AG (NYSE:NVS), NIKE, Inc. (NYSE:NKE), Abbott Laboratories (NYSE:ABT), and PepsiCo, Inc. (NYSE:PEP). This group of stocks’ market valuations resemble MRK’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BAC | 88 | 26637282 | -3 |
| PFE | 66 | 2128534 | 0 |
| T | 51 | 1158558 | -6 |
| NVS | 25 | 1686255 | 4 |
| NKE | 75 | 4218416 | 4 |
| ABT | 62 | 4285555 | -5 |
| PEP | 52 | 2937459 | -1 |
| Average | 59.9 | 6150294 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 59.9 hedge funds with bullish positions and the average amount invested in these stocks was $6150 million. That figure was $6364 million in MRK’s case. Bank of America Corporation (NYSE:BAC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 25 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MRK is 81.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and beat the market again by 16.1 percentage points. Unfortunately MRK wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MRK were disappointed as the stock returned -3.7% since the end of September (through 11/27) 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 many of these stocks already outperformed the market so far this year.
Follow Merck & Co. Inc. (NYSE:MRK)
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Disclosure: None. This article was originally published at Insider Monkey.
