After identifying the ten most popular stocks among hedge funds according to their third quarter 13F filings, we have decided to break down the top ten stocks that hedge funds love in the pharmaceutical industry. Our list includes the hundreds of hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most-loved healthcare stocks based on the aggregate number of funds owning each.
Medicis Pharmaceutical Corp (NYSE:MRX) was the 10th most popular pharma stock among hedge funds during 3Q, with 32 funds holding interest. The net increase in filers was three, the most of our ten stocks listed. Medicis is up over 30% year to date. Driving Medicis higher has been a buyout offer by Valeant Pharmaceuticals. The buyout was for $44 per share and valued Medicis at $2.6 billion. Even with the premium on its shares, the company still trades in line with its peers on a valuation basis at around 30x earnings.
Celgene Corporation (NASDAQ:CELG) was the ninth most popular pharma stock, seeing a net decrease of eight filers, the largest decrease of all ten pharma stocks listed. Celgene is a biopharma company, but trades in line with the much larger pharma stocks at 21x earnings, such as Johnson & Johnson and Pfizer. Trading at 14x forward earnings and having a 22% expected EPS annual growth rate, it appears that Celgene is a good buy.
Eli Lilly & Co. (NYSE:LLY) saw 37 hedge funds owning shares, putting it at eighth on our list. Eli trades on the very low end of the industry at 13x earnings, while also paying a 4%+ dividend. Eli is down almost 10% over the last month on a 3Q earnings miss, but is expected to grow earnings next year by 10%. We see Eli as a good value, with one of the more solid dividends in the industry.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) filled the seventh position with 38 filers owning the pharma company at the end of 3Q. Valeant trades at an almost 300x P/E after a pop in the stock on the news it would acquire the 10th most popular pharma stock among hedge funds, Medicis. The acquisition will be a driving force behind its five-year expected earnings CAGR of 15%. Despite the stock's high P/E, we believe the combined companies will be able to recognize cost synergies that might not be fully reflected in its expected growth rate.
Teva Pharmaceutical Industries Ltd (NYSE:TEVA) saw a net decrease of five filers from 2Q and had 39 funds owning the stock at the end of 3Q, making it the sixth most popular. Teva is relatively flat on the year, and appears to be mediocre from a valuation standpoint. The pharma company trades at a 16x P/E and is expected to grow 5-year EPS at only 8%. Worth keeping an eye on is whether Teva can make a play for Amarin, which would then change our thesis on the company.
Abbott Laboratories (NYSE:ABT), the fifth most popular pharma stock among hedge funds, saw 47 filers holding ownership at the end of the third quarter. Like Teva, the company has a mediocre P/E at 16x, but Abbott pays a 3% dividend yield and has a solid five-year expected earnings growth rate of 9%. Abbott has a strong product portfolio and a 0.3 beta that gives it an advantage over the other pharma stocks listed so far. Abbott is a Diamond Hill top pick.
Sanofi SA (NYSE:SNY) called 52 hedge funds as owners and came in at fourth on our list. Sanofi appears mediocre on the surface with a 16x trailing P/E and a 2% expected five-year earnings growth rate, but its 3.7% dividend is where the stock stands out. Sanofi's dividend is only a 60% payout on earnings, and with $4 billion in cash on hand, the company could easily boost its yield going forward.
Merck & Co., Inc. (NYSE:MRK) only slightly outpaced Sanofi for third place with 53 hedge funds owning the stock at the end of last quarter. Trading at 20x trailing earnings, Merck is in line with other $100+ billion market cap pharma companies, but looking at Merck’s 12x forward P/E suggests the company is a value play. Its 3.8% dividend yield is one of the highest of our major pharma stocks listed. Merck is one of billionaire Stanley Druckenmiller's top five stock picks.
Johnson & Johnson (NYSE:JNJ) and Pfizer Inc. (NYSE:PFE) were miles above the other pharma companies when it came to the number of filers owning their shares. Johnson & Johnson came in at a close second with 71 filers, while Pfizer was the top stock owned with 73 funds invested.
Investors appear to be over discounting Johnson & Johnson’s earnings for next year, where the company trades at 23x trailing earnings, but only 13x forward earnings. Pfizer trades in a similar scenario as Johnson & Johnson, with a trailing P/E in line with the industry at 19x, but with a heavily discounted forward P/E of 11x. Both pharma companies appear to be solid investments, each having a diverse product portfolio and operating internationally. Johnson & Johnson pays a dividend that yields 3.5%, and Pfizer pays a 3.6% yield.