Were Hedge Funds Right About Dumping CVS Health Corporation (CVS)?

CVS Health Corporation (NYSE:CVS) was in 65 hedge funds’ portfolios at the end of June. The all time high for this statistics is 77. CVS shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 71 hedge funds in our database with CVS positions at the end of the first quarter. Our calculations also showed that CVS 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.

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 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 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.

Phillip Gross of Adage 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. With all of this in mind we’re going to take a look at the recent hedge fund action regarding CVS Health Corporation (NYSE:CVS).

Hedge fund activity in CVS Health Corporation (NYSE:CVS)

At the end of June, a total of 65 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from one quarter earlier. By comparison, 55 hedge funds held shares or bullish call options in CVS a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

More specifically, D E Shaw was the largest shareholder of CVS Health Corporation (NYSE:CVS), with a stake worth $218.8 million reported as of the end of September. Trailing D E Shaw was AQR Capital Management, which amassed a stake valued at $218.6 million. Citadel Investment Group, Adage Capital Management, and Citadel Investment Group 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 Owl Creek Asset Management allocated the biggest weight to CVS Health Corporation (NYSE:CVS), around 4.74% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, earmarking 4.15 percent of its 13F equity portfolio to CVS.

Seeing as CVS Health Corporation (NYSE:CVS) has faced falling interest from hedge fund managers, we can see that there is a sect of fund managers that decided to sell off their positions entirely heading into Q3. Intriguingly, Arthur B Cohen and Joseph Healey’s Healthcor Management LP said goodbye to the biggest stake of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $73.2 million in stock, and Aaron Cowen’s Suvretta Capital Management was right behind this move, as the fund dropped about $64.1 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 6 funds heading into Q3.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as CVS Health Corporation (NYSE:CVS) but similarly valued. These stocks are Sony Corporation (NYSE:SNE), HDFC Bank Limited (NYSE:HDB), Fidelity National Information Services Inc. (NYSE:FIS), BlackRock, Inc. (NYSE:BLK), The Toronto-Dominion Bank (NYSE:TD), S&P Global Inc. (NYSE:SPGI), and BP plc (NYSE:BP). This group of stocks’ market values are closest to CVS’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 47.3 hedge funds with bullish positions and the average amount invested in these stocks was $2081 million. That figure was $1136 million in CVS’s case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. CVS Health Corporation (NYSE:CVS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CVS is 50.4. 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. 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately CVS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CVS were disappointed as the stock returned -7.6% since the end of June (through 10/16) 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.