Were Hedge Funds Right About Cutting Johnson & Johnson (JNJ)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Johnson & Johnson (NYSE:JNJ) and determine whether the smart money was really smart about this stock.

Johnson & Johnson (NYSE:JNJ) has experienced a decrease in enthusiasm from smart money recently. Our calculations also showed that JNJ isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Donald Yacktman of Yacktman Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the latest hedge fund action regarding Johnson & Johnson (NYSE:JNJ).

What does smart money think about Johnson & Johnson (NYSE:JNJ)?

At the end of the first quarter, a total of 82 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards JNJ over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the number one position in Johnson & Johnson (NYSE:JNJ), worth close to $926.8 million, accounting for 2.6% of its total 13F portfolio. Coming in second is Cliff Asness of AQR Capital Management, with a $792.3 million position; 1.3% of its 13F portfolio is allocated to the company. Other peers that are bullish include D. E. Shaw’s D E Shaw, Renaissance Technologies and Donald Yacktman’s Yacktman Asset Management. In terms of the portfolio weights assigned to each position Senator Investment Group allocated the biggest weight to Johnson & Johnson (NYSE:JNJ), around 11.16% of its 13F portfolio. Pennant Capital Management is also relatively very bullish on the stock, designating 6.56 percent of its 13F equity portfolio to JNJ.

Due to the fact that Johnson & Johnson (NYSE:JNJ) has faced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of hedgies who were dropping their positions entirely in the first quarter. Interestingly, Arthur B Cohen and Joseph Healey’s Healthcor Management LP sold off the biggest position of all the hedgies watched by Insider Monkey, valued at an estimated $100.4 million in stock. Frank Brosens’s fund, Taconic Capital, also dumped its stock, about $72.9 million worth. These transactions are interesting, as total hedge fund interest dropped by 3 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Johnson & Johnson (NYSE:JNJ). We will take a look at Walmart Inc. (NYSE:WMT), JPMorgan Chase & Co. (NYSE:JPM), The Procter & Gamble Company (NYSE:PG), and Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM). This group of stocks’ market values resemble JNJ’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 74.5 hedge funds with bullish positions and the average amount invested in these stocks was $7109 million. That figure was $5454 million in JNJ’s case. JPMorgan Chase & Co. (NYSE:JPM) is the most popular stock in this table. On the other hand Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the least popular one with only 54 bullish hedge fund positions. Johnson & Johnson (NYSE:JNJ) 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. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately JNJ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on JNJ were disappointed as the stock returned 7.3% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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