Were Hedge Funds Right About Crowding Into Quest Diagnostics (DGX)?

In this article we will check out the progression of hedge fund sentiment towards Quest Diagnostics Incorporated (NYSE:DGX) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Quest Diagnostics Incorporated (NYSE:DGX) was in 46 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DGX has experienced an increase in activity from the world’s largest hedge funds recently. There were 38 hedge funds in our database with DGX holdings at the end of March. Our calculations also showed that DGX isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most stock holders, hedge funds are perceived as underperforming, old financial tools of years past. While there are over 8000 funds in operation at the moment, Our researchers choose to focus on the upper echelon of this club, approximately 850 funds. Most estimates calculate that this group of people administer the lion’s share of the hedge fund industry’s total capital, and by keeping track of their finest stock picks, Insider Monkey has deciphered many investment strategies that have historically outrun the broader indices. Insider Monkey’s flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the new hedge fund action surrounding Quest Diagnostics Incorporated (NYSE:DGX).

What have hedge funds been doing with Quest Diagnostics Incorporated (NYSE:DGX)?

At the end of the second quarter, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 24 hedge funds with a bullish position in DGX a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Quest Diagnostics Incorporated (NYSE:DGX). Citadel Investment Group has a $139.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Citadel Investment Group’s heels is Israel Englander of Millennium Management, with a $88.5 million position; 0.1% of its 13F portfolio is allocated to the company. Other peers with similar optimism encompass John Overdeck and David Siegel’s Two Sigma Advisors, Larry Robbins’s Glenview Capital and Brian Ashford-Russell and Tim Woolley’s Polar Capital. In terms of the portfolio weights assigned to each position Tamarack Capital Management allocated the biggest weight to Quest Diagnostics Incorporated (NYSE:DGX), around 8.73% of its 13F portfolio. Sivik Global Healthcare is also relatively very bullish on the stock, designating 4.72 percent of its 13F equity portfolio to DGX.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Millennium Management, managed by Israel Englander, created the biggest position in Quest Diagnostics Incorporated (NYSE:DGX). Millennium Management had $88.5 million invested in the company at the end of the quarter. Larry Robbins’s Glenview Capital also initiated a $62.2 million position during the quarter. The other funds with brand new DGX positions are Brian Ashford-Russell and Tim Woolley’s Polar Capital, Dmitry Balyasny’s Balyasny Asset Management, and Aaron Cowen’s Suvretta Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Quest Diagnostics Incorporated (NYSE:DGX) but similarly valued. These stocks are Cardinal Health, Inc. (NYSE:CAH), Tractor Supply Company (NASDAQ:TSCO), CBRE Group, Inc. (NYSE:CBRE), BioNTech SE (NASDAQ:BNTX), The Cooper Companies, Inc. (NYSE:COO), Warner Music Group Corp. (NASDAQ:WMG), and Campbell Soup Company (NYSE:CPB). This group of stocks’ market valuations are similar to DGX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.6 hedge funds with bullish positions and the average amount invested in these stocks was $788 million. That figure was $804 million in DGX’s case. Cardinal Health, Inc. (NYSE:CAH) is the most popular stock in this table. On the other hand BioNTech SE (NASDAQ:BNTX) is the least popular one with only 15 bullish hedge fund positions. Quest Diagnostics Incorporated (NYSE:DGX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DGX is 85.6. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on DGX, though not to the same extent, as the stock returned 12.6% since Q2 (through October 23rd) and outperformed the market as well.

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