Pfizer Inc. (PFE): Does Smart Money Anticipate Successful Merger With Allergan (AGN)?

We track more than 800 hedge funds and measure the performance of their long stock picks in real time. We created a giant $1.6 trillion portfolio of hedge funds’ long positions. It is true that hedge funds had some high profile losses this year that are “celebrated” by the media but their stock picks actually outperformed the S&P 500 Total Return Index by 50 basis points and the Russell 2000 Index by 410 basis points during the first 2 months of this year. So, on average it is a good idea to pay attention to what hedge funds are doing. Keeping this in mind, let’s take a look at the hedge fund activity in Pfizer Inc. (NYSE:PFE) and see what renowned investors have to say about the company.

Pfizer Inc. (NYSE:PFE) has experienced an increase in activity from the world’s largest hedge funds recently. Pfizer was in the portfolios of 109 hedge funds tracked by Insider Monkey on December 31. That figure was up from 97 at the end of September and ranked it as the eighth-most popular stock overall. The value of those investors’ holdings in the company also soared, to $8.62 billion from $6.09 billion, despite the stock only making modest gains during the period.

Pfizer did of course have a big catalyst in the fourth quarter which likely prompted many of the new investors to enter the stock, that being its proposed merger with Allergan PLC (NYSE:AGN) towards the end of November, which it’s being reported could help the drug maker avoid as much as $35 billion in taxes, though that report was called “a little misleading” by other sources. Regardless, hedge funds and billionaire money managers have poured into the stock following the announcement. However, not every investor was pleased with the deal, or looking to profit from it. Activist Carl Icahn, no stranger to mergers and splits, called the deal a “travesty” in an op-ed piece published in the New York Times on December 14, saying:

“THE Pfizer-Allergan deal is a travesty. Pfizer, which is based in New York, will move overseas by merging with Allergan, based in Ireland, in a maneuver known as a corporate inversion. The point isn’t to find corporate synergy. It is to leave behind our uncompetitive international tax system.

Not only is this the largest inversion in history, but it will also open the floodgates for other companies to leave the United States, further eroding our tax base, damaging our economy and costing many thousands of jobs”

There’s still a good deal of uncertainty regarding the deal among investors, given the extreme discount to which Allergan is trading at relative to the value that the merger places on it. The deal values Allergan at about $355 per share, while the stock is currently trading below $290, which is a surprisingly large gap for what some believe to be a certainty, barring an act of Congress:

“It’s a larger than usual gap,” Kevin Kedra of Gabelli and Co. told Fortune in November. “But other than an act of Congress, which I don’t think will happen, the deal gets done.”

Now then, let’s take a gander at the new action encompassing Pfizer Inc. (NYSE:PFE) and see which funds are betting on big things (like a successful merger and domicile shift) for the drug behemoth.

What have hedge funds been doing with Pfizer Inc. (NYSE:PFE)?

At the end of the fourth quarter, a total of 109 of the hedge funds tracked by Insider Monkey were long this stock, an increase of 12% from the previous quarter. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the largest position in Pfizer Inc. (NYSE:PFE). Fisher Asset Management has a $1.04 billion position in the stock, comprising 2% of its 13F portfolio. On Fisher Asset Management’s heels is Cliff Asness of AQR Capital Management, with a $563.2 million position; the fund has 1% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism comprise Rob Citrone’s Discovery Capital Management, Keith Meister’s Corvex Capital, and Lee Ainslie’s Maverick Capital.

Consequently, key money managers were breaking ground themselves. JANA Partners, managed by Barry Rosenstein, created the largest position in Pfizer Inc. (NYSE:PFE). JANA Partners had $296 million invested in the company at the end of the quarter. Jim Simons’ Renaissance Technologies also initiated a $257.8 million position during the quarter. The other funds with brand new PFE positions are Andreas Halvorsen’s Viking Global, Jason Karp’s Tourbillon Capital Partners, and Doug Silverman and Alexander Klabin’s Senator Investment Group.

Let’s go over hedge fund activity in other stocks similar to Pfizer Inc. (NYSE:PFE). These stocks are Wal-Mart Stores, Inc. (NYSE:WMT), Royal Dutch Shell plc (ADR) (NYSE:RDS), NIKE, Inc. (NYSE:NKE), and Verizon Communications Inc. (NYSE:VZ). All of these stocks’ market caps are closest to PFE’s market cap.

As you can see these stocks had an average of 48 hedge funds with bullish positions and the average amount invested in these stocks was $3.60 billion. That figure was $8.63 billion in PFE’s case. NIKE, Inc. (NYSE:NKE) is the most popular stock in this table. On the other hand Royal Dutch Shell plc (ADR) (NYSE:RDS) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Pfizer Inc. (NYSE:PFE) is far more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers and that shares are likely trading at a pre-merger discount like Allergan’s, it may be a good idea to analyze it in detail and potentially include it in your portfolio.