Should You Avoid Amgen, Inc. (AMGN)?

The market has been volatile as the Federal Reserve winds down its easy money policies. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 14 percentage points between June 25th and the end of October. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of Amgen, Inc. (NASDAQ:AMGN) and find out how it is affected by hedge funds’ moves.

Is Amgen, Inc. (NASDAQ:AMGN) ready to rally soon? The best stock pickers are in a bearish mood. The number of long hedge fund bets went down by five recently. AMGN was in 68 hedge funds’ portfolios at the end of December. There were 73 hedge funds in our database with AMGN holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as PetroChina Company Limited (ADR) (NYSE:PTR), Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), and Bristol Myers Squibb Co. (NYSE:BMY) to gather more data points.

In the eyes of most shareholders, hedge funds are assumed to be underperforming, old investment vehicles of yesteryear. While there are more than 8000 funds with their doors open today, Our experts look at the bigwigs of this club, about 700 funds. These hedge fund managers control most of all hedge funds’ total capital, and by keeping an eye on their highest performing stock picks, Insider Monkey has discovered various investment strategies that have historically exceeded the broader indices. Insider Monkey’s small-cap hedge fund strategy defeated the S&P 500 index by 12 percentage points a year for a decade in their back tests.

One of the company’s long-term shareholders is activist billionaire Dan Loeb’s Third Point. Here’s what Third Point said about Amgen in one of its letters to investors back in 2014:

“Since its founding in 1980, Amgen (“the company”) has been a pioneer in the biotechnology industry, successfully discovering, developing, and marketing therapeutic agents that have meaningfully impacted human health. From 1989 to 2002, Amgen grew five revolutionary biologic drugs into billion dollar blockbuster products in oncology, nephrology, and inflammation. Today, Amgen is a $105 billion market cap company with annual revenues of nearly $20 billion and annual net income of over $5 billion.

Considering this track record, Amgen’s long‐term underperformance relative to its biotech peers is surprising. The company has a compelling mix of long‐duration, high‐margin mature products like Neulasta and Enbrel, and a number of exciting high growth assets, including recently launched blockbusters like Prolia and Xgeva along with innovative latestage pipeline assets like evolocumab. Yet, using nearly any valuation metric, the Company trades at a substantial discount to peers. Amgen even trades at a discount to the US pharmaceutical sector, despite superior revenue and earnings growth rates. Amgen’s current discount to fair valuation – and the lack of structural hurdles to closing this gap – make it an attractive investment opportunity. Third Point is now one of the company’s largest shareholders.

Amgen has all the hallmarks of a hidden value situation, one of our favorite investment themes. The company does not receive proper credit from investors for either the cash generative potential of its mature products or the coming financial impact of its growth assets. In the mature products segment, we believe revenues will be sustainable and
concerns about potential erosion are overstated. With respect to Amgen’s pipeline, we believe the market underappreciates how disruptive some of its new products will be. Our conviction about the company’s growth pipeline has been bolstered by our discussions with Third Point’s newly created Scientific and Medical Advisory Board (“SMAB”) led by renowned oncologist Dr. David Agus. Dr. Agus has helped us assemble a world‐class team
of scientists and physicians to assist in our evaluation of therapeutic companies and their clinical assets.

We believe the obscured fundamental value and investor skepticism that have led to Amgen’s valuation discount can be easily unlocked. Throughout our due diligence and discussions with sell‐side analysts and other investors, it became clear that the market has penalized Amgen for several key reasons: 1) its historical lack of R&D productivity; 2) more than a decade of flat operating margins; and 3) the suspension of its share repurchase program in 2013 following its $9 billion acquisition of Onyx Pharmaceuticals.”

Keeping this in mind, we’re going to analyze the key action encompassing Amgen, Inc. (NASDAQ:AMGN).

How are hedge funds trading Amgen, Inc. (NASDAQ:AMGN)?

Heading into 2016, a total of 68 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 7% from one quarter earlier. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Third Point has the number one position in Amgen, Inc. (NASDAQ:AMGN), worth close to $1.47 billion, accounting for 14.9% of its total 13F portfolio. The second largest stake is held by Samuel Isaly of OrbiMed Advisors, with a $474.2 million position; the fund has 4.3% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions encompass D. E. Shaw’s D E Shaw, Cliff Asness’s AQR Capital Management and Israel Englander’s Millennium Management.

Since Amgen, Inc. (NASDAQ:AMGN) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of funds who were dropping their entire stakes last quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the biggest position of the “upper crust” of funds followed by Insider Monkey, comprising about $47.9 million in call options., and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund dumped about $45 million worth of shares.

Let’s also examine hedge fund activity in other stocks similar to Amgen, Inc. (NASDAQ:AMGN). These stocks are PetroChina Company Limited (ADR) (NYSE:PTR), Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), Bristol Myers Squibb Co. (NYSE:BMY), and Altria Group Inc (NYSE:MO). This group of stocks’ market caps are similar to AMGN’s market cap.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1.64 billion. That figure was $4.69 billion in AMGN’s case. Bristol Myers Squibb Co. (NYSE:BMY) is the most popular stock in this table. On the other hand PetroChina Company Limited (ADR) (NYSE:PTR) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Amgen, Inc. (NASDAQ:AMGN) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.