The world's largest funds or mega funds managing between $100 billion and over a trillion dollars, such as Fidelity Investments, Goldman Sachs, and Vanguard Group, together control almost a third of the assets invested in the U.S. equity markets. These amount to just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Individually and collectively, they pack enough firepower to move stocks based on their trading activities. In this article, we examine the big pharmaceutical group stocks that they are most bullish and bearish about, based on our research of their latest available Q3 institutional 13-F filings.
Taken together, these mega managers are bullish on the group, adding $2.09 billion to their prior $239 billion prior quarter holdings in the big pharmaceuticals group. They are also severely under-weight the group by a factor of 0.64, however that may be because a good number of the companies in this group are foreign, mostly Europe-based, so they are likely to be held by a large number of overseas institutions (for more general information on these mega funds, please look at the end of the article).
The following are the big pharmaceutical group companies that mega fund managers are bullish about and that trade at undervalued levels compared to their peers (see Table):
Pfizer Inc. (PFE): PFE is a global pharmaceutical company that discovers and develops branded prescription drugs for cardiovascular and metabolic diseases and other conditions. It operates via three business segments: health care, animal health and consumer health care. This is collectively the largest position for mega funds in the big pharmaceuticals group, and together they hold an outsized 32.0% of the outstanding shares, compared to their 19.8% weighting in the group. In Q3, mega funds added a net $60 million to their $54.08 billion position in the group. The largest buyer in Q3 by far was Goldman Sachs ($481 million), and the top holders are State Street Corp. ($6.76 billion) and Vanguard Group ($6.65 billion).
PFE shares have generally fared poorly since their peak in the late 1990s, and while there are still looming concerns over the loss of patent exclusivity in the next few years on some of its drugs and the effect it can have on top-line growth going forward, valuation seems to have finally caught up. At current prices, PFE is trading at an attractive discount at 9-10 forward P/E and 1.8 P/B compared to the averages of 11.3 and 4.2 for the big pharmaceuticals group. Meanwhile, the company is finally projecting continued earnings growth, although tepid, from $2.22 in 2010 to $2.31 in 2012. Also, it offers an attractive dividend yield of 4.1%, above even the generally high 3.3% average for the group.
Merck & Co. (MRK): MRK is a research-driven global pharmaceutical company engaged in developing prescription drugs to treat asthma, osteoporosis, cardiovascular, metabolic and other disorders. It also develops vaccines, biological therapies, animal health, and consumer products. Mega funds added a net $513 million to their $46.05 billion position in the group. The top buyer was by far Goldman Sachs ($824 million), and the top holders are Capital World Investors ($7.52 billion), State Street Corp. ($4.57 billion), Vanguard Group ($4.54 billion) and Wellington Capital Management ($4.38 billion).
Like in the case of PFE above, MRK has also fared poorly in the last decade over concerns about patent expirations which are expected to continue pressuring the top-line over the next few years. Also, pending U.S. health care reform is creating uncertainty, which generally has a negative effect on valuation. However, the stock is trading at bottom-range valuation at 9-10 forward P/E and 2.1 P/B compared to the averages of 11.3 and 4.2 for the big pharmaceuticals group, while earnings growth is expected to resume going forward at a tepid 5.8% annual clip to $3.83 in 2012. Also, like PFE above, MRK offers an attractive dividend yield of 4.4%, well above the 3.3% average for the group.
Sanofi (SNY): SNY is a French developer of pharmaceutical products, vaccines and integrated healthcare solutions targeting various therapeutic areas. Mega funds added a net $469 million in Q3 to their $2.65 billion prior quarter position. The top buyer by far was Fidelity Investments ($407 million), and the top holders are Dodge & Cox ($1.97 billion) and Fidelity Investments ($591 million).
SNY is undervalued and trades at a discount 9 forward P/E and 1.3 P/B compared to the 11.3 and 4.2 averages for the big pharmaceuticals group, and it sports an attractive 3.7% dividend yield. However, earnings are projected to take a hit, dropping from $4.64 in 2010 to $4.03 in 2012 due to loss of patent exclusivity on key products. We believe that SNY shares will remain stuck in the low to mid part of its current $30 to $40 trading range until earnings growth recovers-- maybe sometime after 2012.
The following are some additional big pharmaceutical group stocks that mega funds bought in Q3, but that are not trading at a discount to their peers (see Table):
Eli Lilly & Co. (LLY): LLY develops products to diagnose, prevent and treat human diseases, and it also conducts research to treat diseases in animals and to increase the efficiency of animal food production. Mega funds added a net $350 million in Q3, and the top buyers were Fidelity Investments ($288 million) and Goldman Sachs ($274 million). LLY trades at 11-12 forward P/E, at par with the 11.3 average for the group, while earnings are projected to fall off a cliff from $4.87 in 2010 to $3.63 in 2012 as the company faces significant challenges going forward in terms of reduced sales due to loss of exclusivity on Zyprexa.
Bristol-Myers Squibb Co. (BMY): BMY develops branded pharmaceuticals for the treatment of cardiovascular, virological and other infectious diseases. Mega funds added a $776 million in Q3, and top buyers were Capital World Investors ($346 million) and Fidelity Investments ($276 million). BMY trades at a premium 17-18 forward P/E compared to the 11.3 average for the group, while earnings are projected to fall from $2.30 in 2011 to $2.01 in 2012.
Johnson & Johnson (JNJ): JNJ develops health care products and provides related services to the consumer, pharmaceutical and medical markets. Mega funds added a net $220 million in Q3, and the top buyer was Goldman Sachs ($548 million). JNJ trades at a premium 12-13 forward P/E compared to the 11.3 average for the group, and has a dividend yield of 3.5%. The stock is currently approaching the top of its long-term trading range in the $70 range. However, we believe JNJ is unlikely to break through it based on its valuation and projected earnings performance.
Besides these, mega funds based on their Q3 trading activity indicated that they are bearish on the following big pharmaceutical group stocks (see Table):
Abbott Laboratories (ABT): ABT is a developer of pharmaceuticals, diagnostic systems, nutritional supplements and vascular, ophthalmic and eye care products. Mega funds cut a net $15 million in Q3, and the top seller by far was JP Morgan Chase & Co. ($313 million). ABT is a consistent grower, with annual earnings up every year recently even through the 2008/09 recession. It sports a healthy dividend yield of 3.5%, and trades at 11-12 forward P/E, at par with the 11.3 average for the group. Furthermore, earnings growth is projected at 9.7% annual rate to $5.02 in 2012. Also, the stock is approaching its 2007 highs in the $60 range while earnings are 70%-80% higher than they were then. The stock, based on its dividend yield, earnings growth and stability, has the characteristics that a wide cadre of investors would find attractive.
Other big pharmaceutical group stocks that mega funds were active in Q3 include U.K. based GlaxoSmithKline Plc (GSK), in which they cut a net $49 million; Swiss drug developer Novartis AG (NVS), in which they cut a net $314 million; U.K.-based AstraZeneca Plc (AZN), in which they cut $125 million; and prescription and over-the-counter drug developer Allergan Inc. (AGN), in which they added a net $280 million.
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Note: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group.
These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.