Should You Avoid Covidien plc (COV)?

Covidien plc (NYSE:COV) investors should pay attention to a decrease in hedge fund sentiment lately.

If you’d ask most investors, hedge funds are viewed as slow, old investment tools of the past. While there are over 8000 funds with their doors open today, we hone in on the aristocrats of this club, close to 450 funds. Most estimates calculate that this group oversees the majority of the smart money’s total asset base, and by tracking their highest performing stock picks, we have brought to light a few investment strategies that have historically outperformed Mr. Market. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points annually for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outclassed the S&P 500 index by 23.3 percentage points in 8 months (explore the details and some picks here).

Just as beneficial, positive insider trading sentiment is another way to break down the investments you’re interested in. Just as you’d expect, there are plenty of incentives for an upper level exec to downsize shares of his or her company, but just one, very clear reason why they would buy. Various academic studies have demonstrated the useful potential of this strategy if piggybackers know what to do (learn more here).

Keeping this in mind, it’s important to take a gander at the latest action regarding Covidien plc (NYSE:COV).

How are hedge funds trading Covidien plc (NYSE:COV)?

Heading into Q2, a total of 31 of the hedge funds we track were long in this stock, a change of -21% from one quarter earlier. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings substantially.

When looking at the hedgies we track, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the largest position in Covidien plc (NYSE:COV). First Pacific Advisors LLC has a $362.9 million position in the stock, comprising 3.9% of its 13F portfolio. On First Pacific Advisors LLC’s heels is Yacktman Asset Management, managed by Donald Yacktman, which held a $122.2 million position; 0.6% of its 13F portfolio is allocated to the stock. Other hedge funds that hold long positions include Arthur B Cohen and Joseph Healey’s Healthcor Management LP, Ken Griffin’s Citadel Investment Group and D. E. Shaw’s D E Shaw.

Since Covidien plc (NYSE:COV) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of money managers who were dropping their positions entirely at the end of the first quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest stake of the 450+ funds we watch, comprising an estimated $311.8 million in stock., and Daniel S. Och of OZ Management was right behind this move, as the fund dropped about $101.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 8 funds at the end of the first quarter.

How have insiders been trading Covidien plc (NYSE:COV)?

Bullish insider trading is best served when the primary stock in question has experienced transactions within the past half-year. Over the latest half-year time frame, Covidien plc (NYSE:COV) has experienced zero unique insiders purchasing, and 13 insider sales (see the details of insider trades here).

Let’s check out hedge fund and insider activity in other stocks similar to Covidien plc (NYSE:COV). These stocks are DENTSPLY International Inc. (NASDAQ:XRAY), CareFusion Corporation (NYSE:CFN), C.R. Bard, Inc. (NYSE:BCR), Becton, Dickinson and Co. (NYSE:BDX), and Baxter International Inc. (NYSE:BAX). All of these stocks are in the medical instruments & supplies industry and their market caps resemble COV’s market cap.