Were Hedge Funds Right About Giving Up Philip Morris International Inc. (PM)?

Nina Todic

Wed, Oct 9, 2019, 6:30 PM

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Philip Morris International Inc. (NYSE:PM) was in 39 hedge funds' portfolios at the end of the second quarter of 2019. PM investors should be aware of a decrease in hedge fund sentiment lately. There were 43 hedge funds in our database with PM positions at the end of the previous quarter. Our calculations also showed that PM isn't among the 30 most popular stocks among hedge funds (see the video at the end of this article).

To most traders, hedge funds are seen as unimportant, outdated investment tools of yesteryear. While there are over 8000 funds in operation at the moment, Our researchers look at the aristocrats of this group, about 750 funds. These investment experts administer the lion's share of all hedge funds' total asset base, and by shadowing their unrivaled investments, Insider Monkey has found various investment strategies that have historically beaten the market. Insider Monkey's flagship hedge fund strategy outrun the S&P 500 index by around 5 percentage points per year since its inception in May 2014. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 25.7% since February 2017 (through September 30th) even though the market was up more than 33% during the same period. We just shared a list of 10 short targets in our latest quarterly update .

[caption id="attachment_30621" align="aligncenter" width="487"]

Cliff Asness of AQR Capital Management[/caption]

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the new hedge fund action encompassing Philip Morris International Inc. (NYSE:PM).

What does smart money think about Philip Morris International Inc. (NYSE:PM)?

At Q2's end, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. By comparison, 43 hedge funds held shares or bullish call options in PM a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Philip Morris International Inc. (NYSE:PM) was held by Gardner Russo & Gardner, which reported holding $731.7 million worth of stock at the end of March. It was followed by Cedar Rock Capital with a $720.4 million position. Other investors bullish on the company included Citadel Investment Group, AQR Capital Management, and Diamond Hill Capital.

Seeing as Philip Morris International Inc. (NYSE:PM) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there was a specific group of funds who were dropping their positions entirely by the end of the second quarter. Interestingly, Sander Gerber's Hudson Bay Capital Management dropped the largest stake of all the hedgies watched by Insider Monkey, totaling close to $13.3 million in stock. Andrew Feldstein and Stephen Siderow's fund, Blue Mountain Capital, also dropped its stock, about $5.2 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds by the end of the second quarter.

Let's go over hedge fund activity in other stocks similar to Philip Morris International Inc. (NYSE:PM). We will take a look at Novo Nordisk A/S (NYSE:NVO), Union Pacific Corporation (NYSE:UNP), Thermo Fisher Scientific Inc. (NYSE:TMO), and Accenture Plc (NYSE:ACN). This group of stocks' market valuations are closest to PM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVO,17,2402080,-8 UNP,64,5598478,10 TMO,72,4141477,4 ACN,38,1028621,-2 Average,47.75,3292664,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 47.75 hedge funds with bullish positions and the average amount invested in these stocks was $3293 million. That figure was $3795 million in PM's case. Thermo Fisher Scientific Inc. (NYSE:TMO) is the most popular stock in this table. On the other hand Novo Nordisk A/S (NYSE:NVO) is the least popular one with only 17 bullish hedge fund positions. Philip Morris International Inc. (NYSE:PM) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PM investors were disappointed as the stock returned -1.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.