Phill Gross and Robert Atchinson founded Adage Capital Management in 2001 after spending 18 and 10 years respectively at the Harvard Management Company (HMC). From its start with $1.8 billion in assets under management (AUM) provided by HMC, which also owns a minority stake in the fund, Adage Capital today boasts a public equity portfolio of over $41 billion as highlighted by the fund’s latest 13F filing for the period of March 31. The filing also revealed that Adage’s top ten holdings currently constitute 13.87% of the fund’s public equity portfolio and that it initiated a stake in 119 new stocks in the first quarter. In terms of sectors, Adage is most bullish on healthcare and technology stocks, which accounted for 20% and 15% of the value of Adage’s current public equity portfolio respectively. In this article we are going to focus on Adage’s top small-cap picks: Puma Biotechnology Inc (NYSE:PBYI), Reliance Steel & Aluminum (NYSE:RS), and Burlington Stores Inc (NYSE:BURL).
One may ask why specifically the top small-cap stocks? Before we answer that question, one first needs to understand that hedge funds like Adage Capital Management invest in hundreds of companies, but mostly in large-caps and blue-chip companies that constitute the bulk of such fund’s portfolios. However, our research has shown that in the period between 1999 and 2012 the top small-cap picks of hedge funds outperformed the broader market by nearly one percentage point per month, whereas the top overall picks (mostly large-caps) underperformed by seven basis points per month during the same period. Why pay high fees to own a glut of low-performing stocks when you can invest on your own in hedge funds’ best stock picks? Since its launch in August 2012, Insider Monkey’s small-cap strategy has outperformed the S&P 500 every year, returning over 142% since then, nearly 2.5 times greater than the S&P 500’s returns.
Puma Biotechnology Inc (NYSE:PBYI) is not only Adage’s top small-cap pick, but also the fund’s top pick overall. During the quarter ending March 31, Adage left its stake in Puma Biotechnology Inc (NYSE:PBYI) unchanged at over 5.86 million shares valued at $1.34 billion. Shares of the development-stage biopharmaceutical company are up by more than 130% over the last year and nearly 1,000% over the last five years. For the first quarter of this year, the company reported an adjusted EPS loss of $1.02, compared to the adjusted EPS loss of $0.50 it reported for the same quarter last year. On average, analysts have an ‘Overweight’ rating on the stock with a price target of $274.50, representing phenomenal upside potential of over 100%. Among the hedge funds we track, Samuel Isaly’s Orbimed Advisors and Donald Chiboucis’ Columbus Circle Investors are bullish on Puma Biotechnology Inc (NYSE:PBYI), having increased their stakes by 48% and 2% respectively in the first quarter.