Were Hedge Funds Right About Piling Into Quest Diagnostics Incorporated (DGX)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. 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 Quest Diagnostics Incorporated (NYSE:DGX) and determine whether the smart money was really smart about this stock.

Is Quest Diagnostics Incorporated (NYSE:DGX) undervalued? The best stock pickers were in a bullish mood. The number of bullish hedge fund positions improved by 7 recently. Our calculations also showed that DGX 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). DGX was in 38 hedge funds’ portfolios at the end of the first quarter of 2020. There were 31 hedge funds in our database with DGX holdings at the end of the previous quarter.

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.

Philippe Laffont of Coatue 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind let’s review the fresh hedge fund action regarding Quest Diagnostics Incorporated (NYSE:DGX).

What have hedge funds been doing with Quest Diagnostics Incorporated (NYSE:DGX)?

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 23% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in DGX a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Quest Diagnostics Incorporated (NYSE:DGX) was held by Marshall Wace LLP, which reported holding $52.8 million worth of stock at the end of September. It was followed by Ariel Investments with a $47.6 million position. Other investors bullish on the company included AQR Capital Management, Polaris Capital Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Tamarack Capital Management allocated the biggest weight to Quest Diagnostics Incorporated (NYSE:DGX), around 9.64% of its 13F portfolio. Integral Health Asset Management is also relatively very bullish on the stock, setting aside 4.24 percent of its 13F equity portfolio to DGX.

As one would reasonably expect, specific money managers have jumped into Quest Diagnostics Incorporated (NYSE:DGX) headfirst. Sandler Capital Management, managed by Andrew Sandler, assembled the largest position in Quest Diagnostics Incorporated (NYSE:DGX). Sandler Capital Management had $7.3 million invested in the company at the end of the quarter. Wayne Cooperman’s Cobalt Capital Management also made a $3.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Benjamin A. Smith’s Laurion Capital Management, and Greg Eisner’s Engineers Gate Manager.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Quest Diagnostics Incorporated (NYSE:DGX) but similarly valued. We will take a look at Datadog, Inc. (NASDAQ:DDOG), XP Inc. (NASDAQ:XP), FMC Corporation (NYSE:FMC), and Fifth Third Bancorp (NASDAQ:FITB). This group of stocks’ market values are closest to DGX’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $493 million. That figure was $383 million in DGX’s case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand XP Inc. (NASDAQ:XP) is the least popular one with only 13 bullish hedge fund positions. Quest Diagnostics Incorporated (NYSE:DGX) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on DGX as the stock returned 43% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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