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Dorset Management Made a Bundle By Betting on Biotech and Energy; More Profits to Come?

David M. Knott’s Dorset Management seems to have had an excellent start to the year. Knott’s 55 picks from its 13F portfolio in companies with a market capitalization of over $1.0 billion at the end of 2014, mainly companies from the energy, healthcare and finance sectors, returned 11.6% in the first quarter of 2015 compared to the S&P 500 Index ETF (SPY), which inched up by 0.9% during the same period. The first five companies from Dorset Management in which the fund owns the largest long positions are Ligand Pharmaceuticals Inc. (NASDAQ:LGND), Pfizer Inc. (NYSE:PFE), Anadarko Petroleum Corporation (NYSE:APC), Schlumberger Limited. (NYSE:SLB), and Cimarex Energy Co (NYSE:XEC). These stakes amass 37.86% of its total equity portfolio value of $424.2 million, and delivered weighted average returns of 13.06% during the first quarter of 2015. The large portfolio allocation of the five largest positions shows that Dorset’s portfolio is not very diversified, reflecting the fact that the investor is relying on specific sectors that proved to be more profitable, in this case the energy and healthcare sectors.

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Following the activity of hedge funds is important because our research showed that imitating their stock picks can help a retail investor generate alpha, despite the fact that 13Fs are usually filed around 45 days after the end of a calendar quarter. While most investors believe tracking 13F filings is useless because of the delay, we have expanded it to 60 days to be on the safe side and still obtained significant returns in backtests (read more details here). The key to outperforming the market through following 13F filings is to focus on small-cap stocks. Our strategy based on the 15 most popular small-cap picks among over 700 hedge funds generated double-digit alpha per year and returned 137% in the last 2.5 years, versus the S&P 500 ETF (SPY)’s gain of some 55%.

Ligand Pharmaceuticals Inc. (NASDAQ:LGND) is a biotechnology company that represents the largest holding in Dorset Management’s equity portfolio, the stake amassing 1.25 million shares valued at $66.50 million at the end of 2014, equal to 15.67% of the portfolio.  Having the highest performance among the five analyzed long positions, the stock had an amazing return of 44.91% during the first three months of 2015, amid posting a revenue of $65 million 2014. In addition to the latest positive tendencies in the biotechnology sector of reaching new highs and the stock’s significant appreciation, analysts currently have a consensus price target of over $93.40 for Ligand Pharmaceuticals Inc. (NASDAQ:LGND), more than 10% upside with shares currently trading at $84.43. Mark Lampert’s Biotechnology Value Fund is another shareholder of Ligand Pharmaceuticals Inc. (NASDAQ:LGND), disclosing 860,100 shares in its latest 13F.

David Knott’s stake in Pfizer Inc. (NYSE:PFE) remained unchanged during the last quarter of 2014, comprising around 1.16 million shares valued at $36.11 million, representing 8.51% of the portfolio. Pfizer Inc. (NYSE:PFE)’s stock advanced by 12.66% during the first three months of the year, being the second-best performer in the lot. Citing the latest news, it seems that Mylan NV (NASDAQ:MYL) has come to an agreement regarding Viagra patent prosecution with Pfizer Inc. which allow it to launch its own generic version of the drug before Pfizer’s Viagra patent expires in 2020. Being a top leading drug for Pfizer Inc. (NYSE:PFE) ever since 1998, when it was approved by the US FDA, Viagra holds a dominant position of 45% share in the market of sexual dysfunction, generating sales of $1.3 billion in the last year. The value of the settlement is not known yet. Despite not having the exclusive patent for Viagra in the near future and considering the increased competition among generic drug producers, nevertheless Pfizer remains one of the top gainers among stocks with a market capitalization of over $100 billion. One of the long-term shareholders of Pfizer Inc. (NYSE:PFE) is Ken Fisher’s Fisher Asset Management, which owns close to 31.20 million shares according to its latest 13F filing.

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