Were Hedge Funds Right About Merck & Co., Inc. (MRK)?

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 Merck & Co., Inc. (NYSE:MRK) and determine whether the smart money was really smart about this stock.

Merck & Co., Inc. (NYSE:MRK) has seen an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that MRK 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.

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 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.

Dmitry Balyasny of Balyasny 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 let’s take a peek at the fresh hedge fund action encompassing Merck & Co., Inc. (NYSE:MRK).

How are hedge funds trading Merck & Co., Inc. (NYSE:MRK)?

At the end of the first quarter, a total of 78 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 1% from the previous quarter. On the other hand, there were a total of 64 hedge funds with a bullish position in MRK a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Merck & Co., Inc. (NYSE:MRK) was held by Arrowstreet Capital, which reported holding $896.3 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $685.3 million position. Other investors bullish on the company included AQR Capital Management, Renaissance Technologies, and D E Shaw. In terms of the portfolio weights assigned to each position Kahn Brothers allocated the biggest weight to Merck & Co., Inc. (NYSE:MRK), around 14.07% of its 13F portfolio. Sphera Global Healthcare Fund is also relatively very bullish on the stock, dishing out 8.36 percent of its 13F equity portfolio to MRK.

Now, specific money managers have jumped into Merck & Co., Inc. (NYSE:MRK) headfirst. Antipodes Partners, managed by Jacob Mitchell, assembled the most outsized position in Merck & Co., Inc. (NYSE:MRK). Antipodes Partners had $142.5 million invested in the company at the end of the quarter. Doron Breen and Mori Arkin’s Sphera Global Healthcare Fund also initiated a $66.8 million position during the quarter. The other funds with new positions in the stock are Jeremy Green’s Redmile Group, Michael Hintze’s CQS Cayman LP, and Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Merck & Co., Inc. (NYSE:MRK) but similarly valued. We will take a look at The Coca-Cola Company (NYSE:KO), Novartis AG (NYSE:NVS), Bank of America Corporation (NYSE:BAC), and Pfizer Inc. (NYSE:PFE). This group of stocks’ market caps resemble MRK’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 61.75 hedge funds with bullish positions and the average amount invested in these stocks was $11704 million. That figure was $5026 million in MRK’s case. Bank of America Corporation (NYSE:BAC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 30 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. 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 MRK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MRK were disappointed as the stock returned 0.3% 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.