Was The Smart Money Right About Merck (MRK)?

The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the second quarter, which unveil their equity positions as of June 30th. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Merck & Co., Inc. (NYSE:MRK).

Merck & Co., Inc. (NYSE:MRK) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 79 hedge funds’ portfolios at the end of the second quarter of 2021. Our calculations also showed that MRK isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). At the end of this article we will also compare MRK to other stocks including Broadcom Inc (NASDAQ:AVGO), Novo Nordisk A/S (NYSE:NVO), and Danaher Corporation (NYSE:DHR) to get a better sense of its popularity.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

David Siegel of Two Sigma Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. Recently we came across a high growth stock that has tons of hidden assets and is trading at an extremely cheap valuation. We go through lists like the 10 best growth stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to take a gander at the key hedge fund action regarding Merck & Co., Inc. (NYSE:MRK).

Do Hedge Funds Think MRK Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 79 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in MRK over the last 24 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Fisher Asset Management held the most valuable stake in Merck & Co., Inc. (NYSE:MRK), which was worth $802.3 million at the end of the second quarter. On the second spot was Berkshire Hathaway which amassed $712.2 million worth of shares. Two Sigma Advisors, Arrowstreet Capital, and AQR Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 7.98% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, dishing out 6.2 percent of its 13F equity portfolio to MRK.

Due to the fact that Merck & Co., Inc. (NYSE:MRK) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few hedge funds who sold off their entire stakes by the end of the second quarter. It’s worth mentioning that Gordon W Malin’s Mountain Road Advisors said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $25.4 million in stock, and Mika Toikka’s AlphaCrest Capital Management was right behind this move, as the fund cut about $13.4 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Merck & Co., Inc. (NYSE:MRK). We will take a look at Broadcom Inc (NASDAQ:AVGO), Novo Nordisk A/S (NYSE:NVO), Danaher Corporation (NYSE:DHR), Wells Fargo & Company (NYSE:WFC), Accenture Plc (NYSE:ACN), BHP Group (NYSE:BHP), and Shopify Inc (NYSE:SHOP). This group of stocks’ market values resemble MRK’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 56.3 hedge funds with bullish positions and the average amount invested in these stocks was $5425 million. That figure was $5296 million in MRK’s case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 18 bullish hedge fund positions. Merck & Co., Inc. (NYSE:MRK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MRK is 73.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and still beat the market by 2.3 percentage points. Hedge funds were also right about betting on MRK as the stock returned 14.2% since the end of Q2 (through 10/29) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.