Were Hedge Funds Right About Souring On Teva Pharmaceutical (TEVA)?

Asma UL Husna

Sat, Mar 30, 2019, 6:15 PM

"October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being '08 and the Crash of '87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the '87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March '09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher." This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Is Teva Pharmaceutical Industries Limited (NYSE:TEVA) the right pick for your portfolio? Prominent investors are selling. The number of long hedge fund positions shrunk by 1 lately. Our calculations also showed that TEVA isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Let's review the recent hedge fund action surrounding Teva Pharmaceutical Industries Limited (NYSE:TEVA).

What have hedge funds been doing with Teva Pharmaceutical Industries Limited (NYSE:TEVA)?

Heading into the first quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TEVA over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Berkshire Hathaway held the most valuable stake in Teva Pharmaceutical Industries Limited (NYSE:TEVA), which was worth $666.9 million at the end of the third quarter. On the second spot was Abrams Capital Management which amassed $285.6 million worth of shares. Moreover, Brahman Capital, Highfields Capital Management, and Polaris Capital Management were also bullish on Teva Pharmaceutical Industries Limited (NYSE:TEVA), allocating a large percentage of their portfolios to this stock.

Due to the fact that Teva Pharmaceutical Industries Limited (NYSE:TEVA) has experienced a decline in interest from hedge fund managers, we can see that there were a few fund managers that elected to cut their positions entirely by the end of the third quarter. At the top of the heap, Steve Cohen's Point72 Asset Management dropped the biggest investment of all the hedgies monitored by Insider Monkey, comprising about $8.9 million in stock, and Miguel Fidalgo's Triarii Capital was right behind this move, as the fund dropped about $4.7 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Teva Pharmaceutical Industries Limited (NYSE:TEVA). We will take a look at Expedia Group, Inc. (NASDAQ:EXPE), Align Technology, Inc. (NASDAQ:ALGN), KB Financial Group, Inc. (NYSE:KB), and FleetCor Technologies, Inc. (NYSE:FLT). This group of stocks' market valuations are closest to TEVA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EXPE,39,2211902,2 ALGN,37,1436721,0 KB,6,49264,2 FLT,33,1320948,-4 Average,28.75,1254709,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $1255 million. That figure was $2006 million in TEVA's case. Expedia Group, Inc. (NASDAQ:EXPE) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 6 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. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately TEVA wasn't in this group. Hedge funds that bet on TEVA were disappointed as the stock returned 7.1% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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