Were These Hedge Funds Right About AmerisourceBergen Corporation (ABC)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in AmerisourceBergen Corporation (NYSE:ABC)? The smart money sentiment can provide an answer to this question.

AmerisourceBergen Corporation (NYSE:ABC) was in 40 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. ABC shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. There were 41 hedge funds in our database with ABC positions at the end of the first quarter. Our calculations also showed that ABC 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.

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Seth Klarman of Baupost Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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 review the latest hedge fund action encompassing AmerisourceBergen Corporation (NYSE:ABC).

How are hedge funds trading AmerisourceBergen Corporation (NYSE:ABC)?

At Q2’s end, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ABC over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in AmerisourceBergen Corporation (NYSE:ABC), which was worth $191.2 million at the end of the third quarter. On the second spot was Glenview Capital which amassed $96.3 million worth of shares. Antipodes Partners, Polar Capital, and Baupost 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 MD Sass allocated the biggest weight to AmerisourceBergen Corporation (NYSE:ABC), around 4.68% of its 13F portfolio. Healthcare Value Capital is also relatively very bullish on the stock, earmarking 3.86 percent of its 13F equity portfolio to ABC.

Because AmerisourceBergen Corporation (NYSE:ABC) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there were a few hedgies that decided to sell off their full holdings heading into Q3. Intriguingly, Christopher James’s Partner Fund Management dumped the biggest stake of the 750 funds tracked by Insider Monkey, totaling close to $30 million in stock, and Kevin Molloy’s Iron Triangle Partners was right behind this move, as the fund sold off about $9.7 million worth. These transactions 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 similar to AmerisourceBergen Corporation (NYSE:ABC). These stocks are Carvana Co. (NYSE:CVNA), Alexandria Real Estate Equities Inc (NYSE:ARE), Realty Income Corporation (NYSE:O), Hilton Worldwide Holdings Inc (NYSE:HLT), Rogers Communications Inc. (NYSE:RCI), D.R. Horton, Inc. (NYSE:DHI), and Southwest Airlines Co. (NYSE:LUV). This group of stocks’ market valuations are closest to ABC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.4 hedge funds with bullish positions and the average amount invested in these stocks was $1657 million. That figure was $647 million in ABC’s case. D.R. Horton, Inc. (NYSE:DHI) is the most popular stock in this table. On the other hand Rogers Communications Inc. (NYSE:RCI) is the least popular one with only 16 bullish hedge fund positions. AmerisourceBergen Corporation (NYSE:ABC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ABC is 56.6. 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 negative signal and 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately ABC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ABC investors were disappointed as the stock returned -4.3% since the end of June (through 10/30) 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 most of these stocks already outperformed the market in 2020.

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