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

Reymerlyn Martin

Sat, Jun 1, 2019, 7:53 AM

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.

Pfizer Inc. (NYSE:PFE) shareholders have witnessed a decrease in hedge fund interest of late. Our calculations also showed that PFE isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

We're going to view the fresh hedge fund action encompassing Pfizer Inc. (NYSE:PFE).

Hedge fund activity in Pfizer Inc. (NYSE:PFE)

Heading into the second quarter of 2019, a total of 53 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PFE over the last 15 quarters. As you can see, hedge funds have been souring on Pfizer since the first quarter of 2016 when Pfizer shares were trading below $30.

Fisher Asset Management was the largest shareholder of Pfizer Inc. (NYSE:PFE), with a stake worth $1.8 billion reported as of the end of March. Trailing Fisher Asset Management was AQR Capital Management, which amassed a stake valued at $1049.6 million. D E Shaw, Adage Capital Management, and Diamond Hill Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Pfizer Inc. (NYSE:PFE) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there were a few money managers that decided to sell off their positions entirely last quarter. Interestingly, Samuel Isaly's OrbiMed Advisors dropped the biggest stake of all the hedgies tracked by Insider Monkey, valued at an estimated $26.3 million in stock. Late Irving Kahn's fund, Kahn Brothers, also dumped its stock, about $23.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 6 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Pfizer Inc. (NYSE:PFE). These stocks are Chevron Corporation (NYSE:CVX), AT&T Inc. (NYSE:T), Novartis AG (NYSE:NVS), and Wells Fargo & Company (NYSE:WFC). This group of stocks' market caps are similar to PFE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVX,53,2167224,5 T,41,1083936,-15 NVS,33,1984333,-1 WFC,73,25750715,-4 Average,50,7746552,-3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 50 hedge funds with bullish positions and the average amount invested in these stocks was $7747 million. That figure was $5290 million in PFE's case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 33 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 calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on PFE, though not to the same extent, as the stock lost -0.5% during the same time frame and outperformed the market by a tiny margin.

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

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