Were Hedge Funds Right About UnitedHealth Group Inc. (UNH)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about UnitedHealth Group Inc. (NYSE:UNH).

Is UnitedHealth Group Inc. (NYSE:UNH) worth your attention right now? The smart money was taking a pessimistic view. The number of bullish hedge fund bets were cut by 8 in recent months. UnitedHealth Group Inc. (NYSE:UNH) was in 96 hedge funds’ portfolios at the end of June. The all time high for this statistics is 104. Our calculations also showed that UNH currently ranks 22nd 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). There were 104 hedge funds in our database with UNH holdings at the end of March.

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.

Sahm Adrangi of Kerrisdale 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 let’s view the key hedge fund action encompassing UnitedHealth Group Inc. (NYSE:UNH).

How have hedgies been trading UnitedHealth Group Inc. (NYSE:UNH)?

At second quarter’s end, a total of 96 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 68 hedge funds with a bullish position in UNH a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Eagle Capital Management held the most valuable stake in UnitedHealth Group Inc. (NYSE:UNH), which was worth $1075.4 million at the end of the third quarter. On the second spot was Lone Pine Capital which amassed $891.9 million worth of shares. Egerton Capital Limited, Fisher Asset Management, and Orbis Investment Management 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 Abrams Bison Investments allocated the biggest weight to UnitedHealth Group Inc. (NYSE:UNH), around 13.77% of its 13F portfolio. Route One Investment Company is also relatively very bullish on the stock, designating 10.88 percent of its 13F equity portfolio to UNH.

Seeing as UnitedHealth Group Inc. (NYSE:UNH) has faced declining sentiment from the smart money, logic holds that there exists a select few funds that decided to sell off their entire stakes by the end of the second quarter. At the top of the heap, Daniel Sundheim’s D1 Capital Partners sold off the biggest investment of all the hedgies watched by Insider Monkey, comprising an estimated $79.8 million in stock. Robert Pohly’s fund, Samlyn Capital, also said goodbye to its stock, about $61.8 million worth. These moves are interesting, as aggregate hedge fund interest fell by 8 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as UnitedHealth Group Inc. (NYSE:UNH) but similarly valued. We will take a look at The Home Depot, Inc. (NYSE:HD), Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA), Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), Adobe Inc. (NASDAQ:ADBE), and Bank of America Corporation (NYSE:BAC). This group of stocks’ market values are closest to UNH’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 82.1 hedge funds with bullish positions and the average amount invested in these stocks was $7902 million. That figure was $8326 million in UNH’s case. Adobe Inc. (NASDAQ:ADBE) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. UnitedHealth Group Inc. (NYSE:UNH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for UNH is 66.2. 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 UNH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on UNH were disappointed as the stock returned 12.3% 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.