At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Teva Pharmaceutical Industries Limited (NYSE:TEVA) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is Teva Pharmaceutical Industries Limited (NYSE:TEVA) undervalued? The best stock pickers were in a bullish mood. The number of long hedge fund positions rose by 6 in recent months. Our calculations also showed that TEVA 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). 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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
David Abrams of Abrams Capital Management
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 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. Keeping this in mind we’re going to check out the key hedge fund action encompassing Teva Pharmaceutical Industries Limited (NYSE:TEVA).
How are hedge funds trading Teva Pharmaceutical Industries Limited (NYSE:TEVA)?
Heading into the second quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 26% from one quarter earlier. On the other hand, there were a total of 32 hedge funds with a bullish position in TEVA a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Berkshire Hathaway was the largest shareholder of Teva Pharmaceutical Industries Limited (NYSE:TEVA), with a stake worth $384.2 million reported as of the end of September. Trailing Berkshire Hathaway was Abrams Capital Management, which amassed a stake valued at $215.9 million. Miller Value Partners, Renaissance Technologies, and Citadel Investment 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 Abrams Capital Management allocated the biggest weight to Teva Pharmaceutical Industries Limited (NYSE:TEVA), around 8.5% of its 13F portfolio. Miller Value Partners is also relatively very bullish on the stock, earmarking 4.57 percent of its 13F equity portfolio to TEVA.
Consequently, some big names were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Teva Pharmaceutical Industries Limited (NYSE:TEVA). Arrowstreet Capital had $23.9 million invested in the company at the end of the quarter. Arthur B Cohen and Joseph Healey’s Healthcor Management LP also made a $13.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Kevin Molloy’s Iron Triangle Partners, and Michael Castor’s Sio Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Teva Pharmaceutical Industries Limited (NYSE:TEVA) but similarly valued. We will take a look at Freeport-McMoRan Inc. (NYSE:FCX), Genuine Parts Company (NYSE:GPC), Hasbro, Inc. (NASDAQ:HAS), and J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT). All of these stocks’ market caps are similar to TEVA’s market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FCX,42,770016,-13 GPC,22,164418,1 HAS,25,451618,-11 JBHT,25,225951,-3 Average,28.5,403001,-6.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $403 million. That figure was $867 million in TEVA’s case. Freeport-McMoRan Inc. (NYSE:FCX) is the most popular stock in this table. On the other hand Genuine Parts Company (NYSE:GPC) is the least popular one with only 22 bullish hedge fund positions. Teva Pharmaceutical Industries Limited (NYSE:TEVA) 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 TEVA as the stock returned 37.3% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.