In the first part in our series, we covered five healthcare stocks that the hedge funds in our database have favored heavily for one reason or another, owning a high concentration of their shares as of September 30. Many of those stocks benefit from secular trends such as a rapidly aging population or increased healthcare insurance coverage because of the Affordable Care Act. In the following article, we reveal five more healthcare stocks that the smart money loves. Without further ado, let’s take a closer look at hedge fund sentiment toward Horizon Pharma PLC (NASDAQ:HZNP), Clovis Oncology Inc (NASDAQ:CLVS), Herbalife Ltd. (NYSE:HLF), Alere Inc (NYSE:ALR), and Tenet Healthcare Corp (NYSE:THC).
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
#5 Tenet Healthcare Corp (NYSE:THC)
– Number of Hedge Fund Holders (as of September 30): 44
– Total Value of Hedge Fund Holdings (as of September 30): $1.18 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 32.20%
44 hedge funds were long Tenet Healthcare Corp (NYSE:THC) on September 30, down slightly from the 48 funds that were long the stock on June 30. Because of the strong economy, hospital labor costs are rising and causing margins across the industry to narrow. The lower margins are causing fear for investors, as evidenced by shares of Tenet being down by 40% year-to-date. The worries have transformed Tenet into a value play, with the stock now trading for just 14-times forward earnings estimates, lower than the S&P 500’s forward P/E of over 17. Management is using the weakness in the stock to buy back shares as well, having authorized a $500 million share repurchase program.
#4 Alere Inc (NYSE:ALR)
– Number of Hedge Fund Holders (as of September 30): 39
– Total Value of Hedge Fund Holdings (as of September 30): $1.34 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 32.50%
Sell-side analysts love Alere Inc (NYSE:ALR). One analyst has a ‘Strong Buy’ rating, four have ‘Buy’ ratings, and three have ‘Hold’ ratings. No analysts have a ‘Sell’ rating on the stock. Although shares of the point-of-care diagnostics and services manufacturer for infectious disease, toxicology, and cardio-metabolic disease are off from their August highs by about 30%, they are still in the green year-to-date, with the stock up by 2.32%. Among the funds long Alere is Doug Silverman and Alexander Klabin‘s Senator Investment Group, with a holding of more than 3.0 million shares.