Despite the common perception of insider trading, it remains a fact that out of the hundreds of thousands of insider transactions every year, just a tiny fraction are ruled to be unlawful. In case you haven’t heard, the SEC may have just broken open the most significant case of illegal insider trading in history. As originally reported by Business Insider, Mathew Martoma, a former hedge fund manager employed by CR Intrinsic Investors (a division of Steven Cohen’s SAC Capital), has been arrested today regarding what U.S. officials are deeming “the most lucrative insider-trading scheme ever.”
In the SEC’s complaint, the regulatory body states that Martoma allegedly used nonpublic information from Sydney Gilman, a doctor who was heavily involved in the clinical trials of an Alzheimer’s drug that was being developed by Elan Corporation (NYSE:ELN) and Wyeth, which was acquired by Pfizer Inc. (NYSE:PFE) in 2009.
According to official documents, Gilman “provided Martoma with material nonpublic information regarding not only the safety results, but also the efficacy results for the Phase II Trial,” which prompted him to sell both of his holdings in Elan and Wyeth, worth more than $700 million in full. To add to this, Martoma also shorted both pharma stocks, eventually leading to “over $276 million in illegal profits or avoided losses.” In an official press release, U.S. Attorney Preet Bharara called the situation “blatant corruption,” pointing out the fact that “overnight, Martoma went from bull to bear.”
Now, we’ve already discussed other hedge funds that were selling Elan and Wyeth here, but it’s also worth taking a look at CR Intrinsic Investors’ latest 13F filing with the SEC. Four years later, the hedge fund does not hold shares of Elan anymore, but it still holds close to $2 billion in domestic equities, a few of those within the healthcare field in fact. Here are CR’s top five stock picks in terms of market value, counting down in order of fifth to first.
WellCare Health Plans, Inc. (NYSE:WCG)
Comprising $26.0 million worth of CR Intrinsic’s 13F portfolio, WellCare Health Plans is a provider of managed care services, primarily to government-supported programs. Beginning in 2013, WellCare will use some care management and contract solutions services from TriZetto; the move is expected to boost efficiency, thus profits in the long run. The company has also recently announced it has acquired UnitedHealthcare’s South Carolina Medicaid business, which includes 65,000 Medicaid members.
WellCare hasn’t been a particularly good investment in 2012 thus far, but margins have been trending upward – gross margins were 20.2% last year after resting in the ‘teens’ since most of the recession. Sell-side analysts do expect moderate 5-6% EPS growth over the next half-decade, but it’s the valuation that has us considering WellCare, as its shares trade at bargain bin trailing (9.5X) and forward (9.7X) earnings multiples.
Humana Inc. (NYSE:HUM)
Humana, the health insurance and service provider, is another favorite of CR Intrinsic, as the fund held $29.5 million worth of the stock at the end of last quarter, good for fourth in its entire 13F portfolio. Like WellCare, 2012 hasn’t been particularly strong for Humana, as some investors have been spooked about statewide budget shortfalls throughout the U.S., which can have a negative effect on reimbursement income.
The company also posted earnings last week that fell 4% from Q3 one year earlier, amid higher insurance claims. Still, EPS of $2.62 beat the Street’s estimates ($2.05) quite handily, and Humana also shed more light on its acquisition of Metropolitan Health, which is expected to boost its already booming Medicare Advantage business. That makes it two straight earnings beats for Humana, which is predicted to grow EPS by 8-9% annually over the next five years; at a PEG of nearly 1.0, this growth is attractively priced. Ardent investors would be wise to continually monitor reimbursement developments, though, as state and federal government accounts for more than nine out of every ten dollars that Humana earns.
Agilent Technologies Inc. (NYSE:A)
Agilent Technologies accounts for $30.8 million of CR Intrinsic’s 13F portfolio, and has gained a modest 4.6% in 2012. The company, which provides technical instruments for use in the fields of biotech, pharma, and environmental science, has benefited from a generally positive economic picture, where research tests are increasingly used by a variety of public and private institutions. S&P predicts “mid-single digit sales growth” by the end of this year, which will be led by pharmaceutical companies boosting R&D before a “patent cliff,” and above-average growth from BRIC nations. With sell-side analysts expecting 11-12% annual EPS growth over the next few years, we can’t help but be bullish, and an earnings growth multiple of 1.14 shows that investors haven’t gotten ahead of themselves just yet.
Express Scripts Holding Company (NASDAQ:ESRX)
CR holds a $32.9 million position in Express Scripts, and is likely pleased with its investment this year, as shares of the pharmacy benefit manager have gained nearly 16% in 2012. As you’re probably aware, Express has taken quite a tumble as of late, on the heels of reduced guidance for next year. We’ve already discussed this in prior analyses, and the fallout of its contractual lapse with Walgreen’s that allowed CVS to capture customers, but it appears that “investors’ real fear is the fact that Express believes the 2013 outlook by analysts is overly aggressive.” This increased competition has pressured margins, which currently rest more than 200 basis points below the highs achieved between 2007 and 2009.
It remains to be seen how the company’s issue with Walgreen’s will affect its long term profitability, but it’s worth noting that Wall Street expects growth to slow down significantly over the next few years, especially on the earnings front. Forward-looking EPS forecasts predict 17-18% growth for Express, while it has averaged EPS growth of nearly 25% a year over the past half-decade. Trailing earnings (29.8X) and cash flow (34.1X) multiples show that the stock already has an elevated valuation; there are better ways to “monkey” CR if you so choose.
Apple Inc. (NASDAQ:AAPL)
It comes as no surprise that the Cupertino-based tech giant is the hedge fund’s top holding, accounting for $40.7 million worth of its 13F portfolio. At the end of the third quarter, Apple was the top stock pick among the funds we track, with 146 holding long positions, compared to Google (132) and AIG (110), which were in second and third place respectively. The amount of capital invested in Apple has actually increased by 6.7% from the previous quarter, and now totals a whopping $23.7 billion.
It’s clear that Apple still holds one of the strongest brand names in the tech marketplace today, and has a boatload of cash with zilch for debt. From a valuation standpoint, a selloff that has been called “insanely insane” has pushed shares down to a sub 10.0 forward earnings multiple, and a PEG ratio that screams ‘buy me.’ Apple, however, faces arguably the greatest amount of chatter on any given day, which can have a negative effect on its stock price.
We’d recommend investors buy on the dip now, looking forward to some catalysts that can vault the stock to a fairer valuation, which include: (1) a China Mobile deal, (2) confirmation of a television, (3) a solid first quarter, and (4) a Carl Icahn-led sale of Netflix to the tech giant. Even if none of these hypotheticals come true – with the latter being the most speculative – investors are still getting a company that trades rather cheaply, and is expected to grow EPS by 20-21% a year through 2017.