Should You Avoid Medtronic Inc. (MDT)?

Billionaire hedge fund managers such as Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks. However, hedge funds managers are also extremely good at picking stocks in other categories as evidenced by Goldman Sachs’ so-called VIP list, which includes the 50 most-owned stocks among hedge funds’ top ten holdings. This concentrated basket of stocks outpaced the S&P 500 Index on a quarterly basis 64% of the time between 2001 and 2015. So why don’t we check the hedge fund activity in Medtronic Inc. (NYSE:MDT) during the final quarter of 2015?

Medtronic Inc. (NYSE:MDT) shareholders have witnessed a decrease in hedge fund interest of late. MDT was in 57 hedge funds’ portfolios at the end of December. There were 58 hedge funds in our database with MDT positions at the end of the previous quarter. At the end of this article we will also compare MDT to other stocks including Cisco Systems, Inc. (NASDAQ:CSCO), Philip Morris International Inc. (NYSE:PM), and International Business Machines Corp. (NYSE:IBM) to get a better sense of its popularity.

In the eyes of most stock holders, hedge funds are viewed as slow, outdated investment tools of yesteryear. While there are more than 8000 funds in operation today, Our researchers choose to focus on the moguls of this club, around 700 funds. These hedge fund managers have their hands on the majority of the hedge fund industry’s total capital, and by observing their top picks, Insider Monkey has discovered many investment strategies that have historically defeated the broader indices. Insider Monkey’s small-cap hedge fund strategy outperformed the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Medtronic Inc. (NYSE:MDT) is an Irish-based medical technology, services, and solutions company that engages in the business of therapeutic medical technology, primarily specializing in implantable and interventional therapies. The company’s net sales for the first three quarters of fiscal 2016 that ended January 29 totaled $21.27 billion, which was up from $12.96 billion generated during the same period of the prior year. Nonetheless, much of this revenue growth was attributable to Medtronic’s acquisition of Covidien in January 2015. Covidien was acquired for a total consideration of $50 billion, which included $16 billion in cash and $34 billion of non-cash consideration. Medtronic’s top-line figure was also positively impacted by strong net sales in the U.S. and emerging markets. The shares of the medical devices company are 1% in the red year-to-date despite the company disappointing investors and analysts with its top-line figure for the third quarter of fiscal 2016. Medtronic Inc. (NYSE:MDT) delivered revenue of $6.93 billion for the quarter that ended January 29, which increased 6% year-on-year and missed analysts’ estimates of $6.99 billion.

The majority of analysts covering Medtronic have a ‘Buy’ rating on the stock, while their average 12-month price target amounts to $87.50. The shares of Medtronic are currently trading nearly 16-times expected earnings, as compared to the forward P/E of 14.8 for the Healthcare sector. It should also be noted that in October 2015, Medtronic Inc. (NYSE:MDT)’s Coronary & Structural Heart division, which accounted for approximately 11% of net sales in the nine months that ended December 29, acquired privately-held medical device company Twelve Inc. for roughly $472 million. The freshly-acquired company was focusing on the development of a transcatheter mitral valve replacement device. Therefore, this acquisition will most likely drive up Medtronic’s top-line growth in the upcoming years.

With all of this in mind, let’s take a look at the fresh action regarding Medtronic Inc. (NYSE:MDT).

What have hedge funds been doing with Medtronic Inc. (NYSE:MDT)?

Heading into 2016, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 2% from the third quarter. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Doug Silverman and Alexander Klabin’s Senator Investment Group has the number one position in Medtronic Inc. (NYSE:MDT), worth close to $307.7 million, amounting to 3.8% of its total 13F portfolio. Sitting at the No. 2 spot is Diamond Hill Capital, managed by Ric Dillon, which holds a $264.3 million position; 1.8% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors with similar optimism encompass Phill Gross and Robert Atchinson’s Adage Capital Management, Ken Griffin’s Citadel Investment Group and Jean-Marie Eveillard’s First Eagle Investment Management.

Judging by the fact that Medtronic Inc. (NYSE:MDT) has faced falling interest from hedge fund managers, we can see that there were a few money managers that elected to cut their full holdings in the third quarter. Intriguingly, ClearBridge dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising close to $105.4 million in stock, and Curtis Macnguyen’s Ivory Capital (Investment Mgmt) was right behind this move, as the fund dropped about $89.4 million worth of shares. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 funds in the third quarter.

The final page of this article displays the hedge fund activity in other companies with market capitalizations close to the one of MDT.

Let’s now take a look at hedge fund activity in other stocks similar to Medtronic Inc. (NYSE:MDT). These stocks are Cisco Systems, Inc. (NASDAQ:CSCO), Philip Morris International Inc. (NYSE:PM), International Business Machines Corp. (NYSE:IBM), and Unilever N.V. (ADR) (NYSE:UN). This group of stocks’ market valuations are similar to MDT’s market valuation.

As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $5.28 billion. That figure was $2.10 billion in MDT’s case. Cisco Systems, Inc. (NASDAQ:CSCO) is the most popular stock in this table. On the other hand Unilever N.V. (ADR) (NYSE:UN) is the least popular one with only 12 bullish hedge fund positions. Medtronic Inc. (NYSE:MDT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard CSCO might be a better candidate to consider a long position.

Disclosure: None