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Broadfin Capital and Bridger Management Think SeaSpine Holdings Corp (SPNE) Is Oversold

According to two recent filings with the Securities and Exchange Commission, Kevin Kotler‘s (pictured) Broadfin Capital and Roberto Mignone‘s Bridger Management have disclosed stakes amounting to 900,304 shares and 618,684 shares respectively in SeaSpine Holdings Corp (NASDAQ:SPNE), a recent tax-free spin-off of Integra Lifesciences Holdings Corp (NASDAQ:IART)‘s orthobiologics and spinal fusion hardware business. The holdings amass about 8.18% and 5.6% of SeaSpine’s outstanding shares respectively. SeaSpine is down by over 15% since its IPO in the middle of June, which may have prompted the two funds to take positions.

Kevin Kotler

First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 139% since the launch of our small-cap strategy compared to less than 59% for the S&P 500 (see the details).

Kevin Kotler
Kevin Kotler
Broadfin Capital

SeaSpine Holdings Corp (NASDAQ:SPNE) operates in two segments, one is orthobiologics, which consists of products used as bone graft substitutes to improve bone fusion rates after orthopedic surgeries. Sales from this segment account for 50% of the company’s revenues. The other half of the top line is represented by the spinal fusion hardware portfolio, which consists of products that help in spinal fusion following minimally invasive surgery (MIS), or complex spine, deformity and degenerative procedures. The company has a strong balance sheet according to its Chief Executive Officer Keith Valentine, with $47 million in cash and no debt post spin-off.  Moreover, SeaSpine Holdings Corp (NASDAQ:SPNE) is also growing its portfolio faster in order to capture greater market share. While about two to three new products have been introduced into the market previously on an annual basis, the company is expecting to release eight products this year.

Piper Jaffray initiated coverage on SeaSpine Holdings Corp (NASDAQ:SPNE) recently with an ‘Overweight’ rating and a price target of $24, which provides more than 40% upside to the current trading levels.

However, there are some industry characteristics that might inhibit the company’s rapid growth. According to iData Research, the expected annual growth for the Orthobiologics market from 2014 to 2021 is only 3.4%, and for the spinal Fusion Hardware market the growth figure is even lower at just 0.7%. Thus it is not surprising that since its IPO on June 19, SeaSpine Holdings Corp (NASDAQ:SPNE)’s stock has fallen by about 15%. However, Broadfin Capital and Bridger Management’s latest move might suggest that this presents a great entry point, especially considering that the company currently only has 18% market share in the orthobiologics segment.

Roberto Mignone
Roberto Mignone
Bridger Management

Hedge funds have been enthusiastic about Integra Lifesciences Holdings Corp (NASDAQ:IART), especially during the first quarter when SeaSpine Holdings Corp (NASDAQ:SPNE) was part of its business. Among the funds that we track, 13 had an aggregate investment of $73.78 million in Integra Lifesciences Holdings Corp (NASDAQ:IART) at the end of March, compared to seven firms with $33.43 million in shares at the end of the previous quarter. The largest investors of Integra Lifesciences among the funds we track, as of March 31, were Ken Fisher‘s Fisher Asset Management and Paul Tudor Jones’ Tudor Investment Corp, with respective holdings amounting to 520,200 shares valued at $32.07 million and 200,000 shares valued at $12.33 million.

Disclosure: None

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