Were Hedge Funds Right About Crowding Into Zimmer Biomet Holdings Inc (ZBH)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Zimmer Biomet Holdings Inc (NYSE:ZBH)? The smart money sentiment can provide an answer to this question.

Zimmer Biomet Holdings Inc (NYSE:ZBH) was in 62 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 64. ZBH investors should be aware of an increase in support from the world’s most elite money managers in recent months. There were 51 hedge funds in our database with ZBH positions at the end of the first quarter. Our calculations also showed that ZBH 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Stanley Druckenmiller of Duquesne Capital

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 let’s analyze the fresh hedge fund action regarding Zimmer Biomet Holdings Inc (NYSE:ZBH).

How are hedge funds trading Zimmer Biomet Holdings Inc (NYSE:ZBH)?

At the end of the second quarter, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ZBH over the last 20 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping 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 biggest position in Zimmer Biomet Holdings Inc (NYSE:ZBH). Citadel Investment Group has a $100.7 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Millennium Management, managed by Israel Englander, which holds a $97.9 million position; 0.1% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism contain John W. Rogers’s Ariel Investments, Mario Gabelli’s GAMCO Investors and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Tavio Capital allocated the biggest weight to Zimmer Biomet Holdings Inc (NYSE:ZBH), around 20.22% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, earmarking 3.63 percent of its 13F equity portfolio to ZBH.

As one would reasonably expect, some big names have jumped into Zimmer Biomet Holdings Inc (NYSE:ZBH) headfirst. Woodline Partners, managed by Michael Rockefeller and KarláKroeker, created the biggest position in Zimmer Biomet Holdings Inc (NYSE:ZBH). Woodline Partners had $30.2 million invested in the company at the end of the quarter. Christopher James’s Partner Fund Management also initiated a $21.5 million position during the quarter. The other funds with new positions in the stock are Stanley Druckenmiller’s Duquesne Capital, Donald Sussman’s Paloma Partners, and Michael Gelband’s ExodusPoint Capital.

Let’s also examine hedge fund activity in other stocks similar to Zimmer Biomet Holdings Inc (NYSE:ZBH). These stocks are Rockwell Automation Inc. (NYSE:ROK), Waste Connections, Inc. (NYSE:WCN), Telefonica S.A. (NYSE:TEF), Otis Worldwide Corporation (NYSE:OTIS), Fastenal Company (NASDAQ:FAST), Barclays PLC (NYSE:BCS), and STMicroelectronics N.V. (NYSE:STM). This group of stocks’ market valuations match ZBH’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.3 hedge funds with bullish positions and the average amount invested in these stocks was $588 million. That figure was $753 million in ZBH’s case. Otis Worldwide Corporation (NYSE:OTIS) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Zimmer Biomet Holdings Inc (NYSE:ZBH) is more popular among hedge funds. Our overall hedge fund sentiment score for ZBH is 89.1. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on ZBH as the stock returned 23.3% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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