The Smart Money is Hoarding Shares of These 10 Healthcare Stocks, Part 2

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.

#3 Herbalife Ltd. (NYSE:HLF)

 – Number of Hedge Fund Holders (as of September 30): 32
– Total Value of Hedge Fund Holdings (as of September 30): $1.67 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 33.10%

As long as Bill Ackman keeps his short position in the stock, Herbalife Ltd. (NYSE:HLF) will always be controversial. Ackman famously announced that he was short a billion dollars worth of Herbalife shares in the middle of 2012 and called the company an illegal pyramid scheme. More than three years later, Herbalife is still around, with the FTC having done little, and shares of Herbalife are pretty much trading for the same price that they did back then. Shares of Herbalife have rallied by over 40% year-to-date, based partly on the hope that Ackman might have to cover his short position given his losses in other stocks. However, given Ackman’s excellent long-term track record, that hope might never come true.

#2 Clovis Oncology Inc (NASDAQ:CLVS)

 – Number of Hedge Fund Holders (as of September 30): 31
– Total Value of Hedge Fund Holdings (as of September 30): $1.22 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 34.60%

Clovis Oncology Inc (NASDAQ:CLVS) shares fell substantially on November 16 after the company announced that the confirmed response rate in rociletinib for the treatment of EGFR T790M+ lung cancer was lower than expected and that the FDA requested more data. Analysts are still optimsitic however, with JPMorgan rating the stock ‘Overeight’, with a $42 price target. Elite funds were bullish on the stock in the third quarter as well, with the number of funds long Clovis increasing by 2 to 31. Among the believers is Andreas Halvorsen‘s Viking Global, owning a stake of 836,332 shares.

#1 Horizon Pharma PLC (NASDAQ:HZNP)

 – Number of Hedge Fund Holders (as of September 30): 44
– Total Value of Hedge Fund Holdings (as of September 30): $1.13 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 35.70%

Seeing as Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has experienced a substantial sell-off in recent quarters, it’s not surprising that Horizon Pharma PLC (NASDAQ:HZNP), which has a similar business model, has also sold off. Nevertheless, Valeant shares have stabilized in recent weeks as management has made convincing moves to contain the damage, and Horizon Pharma PLC shares have stabilized too. Horizon recently continued its accretive M&A strategy by buying Crealta Holdings LLC for $510 million in cash in a move that will add between $45 million-to-$50 million to Horizon’s non-GAAP EBITDA in the first year after it’s completed.

Disclosure: None