Were These Hedge Funds Right About Selling Cerner Corporation (CERN)?

In this article we will check out the progression of hedge fund sentiment towards Cerner Corporation (NASDAQ:CERN) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Cerner Corporation (NASDAQ:CERN) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 41. CERN has seen a decrease in enthusiasm from smart money lately. There were 41 hedge funds in our database with CERN holdings at the end of March. Our calculations also showed that CERN 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.

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.

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

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 we’re going to take a gander at the new hedge fund action regarding Cerner Corporation (NASDAQ:CERN).

Hedge fund activity in Cerner Corporation (NASDAQ:CERN)

At Q2’s end, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in CERN a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

The largest stake in Cerner Corporation (NASDAQ:CERN) was held by Generation Investment Management, which reported holding $314.8 million worth of stock at the end of June. It was followed by Starboard Value LP with a $181.1 million position. Other investors bullish on the company included Arrowstreet Capital, Echo Street Capital Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Starboard Value LP allocated the biggest weight to Cerner Corporation (NASDAQ:CERN), around 6.45% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, designating 5.34 percent of its 13F equity portfolio to CERN.

Since Cerner Corporation (NASDAQ:CERN) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of funds who sold off their entire stakes heading into Q3. Interestingly, Michael Blitzer’s Kingstown Capital Management said goodbye to the biggest position of the “upper crust” of funds tracked by Insider Monkey, comprising about $40.9 million in stock. Joseph Edelman’s fund, Perceptive Advisors, also cut its stock, about $6.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cerner Corporation (NASDAQ:CERN) but similarly valued. These stocks are Fiat Chrysler Automobiles NV (NYSE:FCAU), DTE Energy Company (NYSE:DTE), New Oriental Education & Technology Group Inc. (NYSE:EDU), Canadian Natural Resources Limited (NYSE:CNQ), AMETEK, Inc. (NYSE:AME), AmerisourceBergen Corporation (NYSE:ABC), and Carvana Co. (NYSE:CVNA). All of these stocks’ market caps resemble CERN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $1125 million. That figure was $875 million in CERN’s case. Carvana Co. (NYSE:CVNA) is the most popular stock in this table. On the other hand Fiat Chrysler Automobiles NV (NYSE:FCAU) is the least popular one with only 20 bullish hedge fund positions. Cerner Corporation (NASDAQ:CERN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CERN is 54.1. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately CERN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CERN were disappointed as the stock returned 2.5% 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 many of these stocks already outperformed the market so far this year.

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