Were Hedge Funds Right About Pfizer Inc. (PFE)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Pfizer Inc. (NYSE:PFE).

Pfizer Inc. (NYSE:PFE) investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. Pfizer Inc. (NYSE:PFE) was in 66 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 119. Our calculations also showed that PFE 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Ric Dillon of Diamond Hill 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. Now we’re going to analyze the latest hedge fund action surrounding Pfizer Inc. (NYSE:PFE).

How have hedgies been trading Pfizer Inc. (NYSE:PFE)?

Heading into the third quarter of 2020, a total of 66 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -1% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PFE over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

The largest stake in Pfizer Inc. (NYSE:PFE) was held by Two Sigma Advisors, which reported holding $361.9 million worth of stock at the end of September. It was followed by AQR Capital Management with a $325.2 million position. Other investors bullish on the company included D E Shaw, Diamond Hill Capital, and Millennium Management. In terms of the portfolio weights assigned to each position Voleon Capital allocated the biggest weight to Pfizer Inc. (NYSE:PFE), around 9.32% of its 13F portfolio. Game Creek Capital is also relatively very bullish on the stock, dishing out 6.61 percent of its 13F equity portfolio to PFE.

Due to the fact that Pfizer Inc. (NYSE:PFE) has witnessed falling interest from hedge fund managers, it’s easy to see that there is a sect of fund managers who were dropping their full holdings heading into Q3. At the top of the heap, OrbiMed Advisors cut the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $98.3 million in stock, and Renaissance Technologies was right behind this move, as the fund dropped about $84.9 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Pfizer Inc. (NYSE:PFE) but similarly valued. These stocks are Comcast Corporation (NASDAQ:CMCSA), Toyota Motor Corporation (NYSE:TM), AbbVie Inc (NYSE:ABBV), Oracle Corporation (NYSE:ORCL), salesforce.com, inc. (NYSE:CRM), SAP SE (NYSE:SAP), and Chevron Corporation (NYSE:CVX). All of these stocks’ market caps resemble PFE’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 57.7 hedge funds with bullish positions and the average amount invested in these stocks was $4153 million. That figure was $2139 million in PFE’s case. salesforce.com, inc. (NYSE:CRM) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 13 bullish hedge fund positions. Pfizer Inc. (NYSE:PFE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PFE is 48.8. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on PFE as the stock returned 17.2% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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