Heartland Advisors, an investment management firm, published its “Heartland Mid Cap Value Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. In the letter, the fund mentioned that its stock selection was strong in several sectors, and the portfolio finished the first half of the year ahead of its Russell Midcap® Value benchmark. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Heartland Advisors, the fund mentioned Quest Diagnostics Incorporated (NYSE: DGX) and discussed its stance on the firm. Quest Diagnostics Incorporated is a Secaucus, New Jersey-based clinical laboratory with an $18.3 billion market capitalization. DGX delivered a 25.99% return since the beginning of the year, while its 12-month returns are up by 25.12%. The stock closed at $148.22 per share on August 16, 2021.
Here is what Heartland Advisors has to say about Quest Diagnostics Incorporated in its Q2 2021 investor letter:
“Checking lab results. Health care names in the portfolio posted tepid gains during the quarter, continuing a pattern from the beginning of the year. The group has been overlooked as investors flock to economically sensitive areas of the market, however we believe that attractive opportunities still exist in the space. Long-time holding Quest Diagnostics, Inc. (DGX), is one such example.
Quest, one of the largest diagnostic testing and services company in the U.S., has been mostly passed over as investors have reacted to a falloff in COVID-19 testing volumes, which had provided a boost to earnings. While we welcomed the spike in sales last year, we remained focused on our long-term investment thesis for the company.
With shares trading at 11.8x estimated 2021 earnings, we believe investors are failing to recognize a positive inflection in Quest’s core sales. Additionally, the company is gaining market share from smaller players that should further enhance its scale.
Quest should also benefit from industry trends including further consolidation, telemedicine, and a shift by managed care companies toward designating preferred lab networks.”
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Based on our calculations, Quest Diagnostics Incorporated (NYSE: DGX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DGX was in 34 hedge fund portfolios at the end of the first quarter of 2021, compared to 45 funds in the fourth quarter of 2020. Quest Diagnostics Incorporated (NYSE: DGX) delivered a 13.83% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
