Over the past few months the healthcare sector has undergone a roller coaster of a ride, especially in August and September when many investors got wary of the sector being overvalued, especially in terms of future policy relating to drug pricing following the Turing Pharmaceuticals episode and the subsequent comments made by Hillary Clinton. The large-scale sell-off has created interesting opportunities in the sector, and we compiled a list of five cheap healthcare stocks that have significant support from professional money managers, thereby increasing the odds of these stocks soaring in the near term.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 102% over the last 3 years and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 OraSure Technologies, Inc. (NASDAQ:OSUR)
Investors with Long Positions (as of September 30): 25
Aggregate Value of Investors’ Holdings (as of September 30): $38.57 Million
Despite a 14% dip in OraSure Technologies, Inc. (NASDAQ:OSUR)’s stock price during the third quarter, the total number of hedge funds backing the company increased by four, while the aggregate value of these holdings fell by $2.7 million. In its financial results for the third trimester, OraSure Technologies, Inc. (NASDAQ:OSUR) managed to beat both the top and bottom line estimates. Jim Simons‘ Renaissance Technologies holds about 1.55 million shares of the company as of the end of September.
#4 Amicus Therapeutics, Inc. (NASDAQ:FOLD)
Investors with Long Positions (as of September 30): 26
Aggregate Value of Investors’ Holdings (as of September 30): $630.70 Million
The number of funds with long positions in the biopharmaceutical company focused on rare and orphan diseases dropped by five during the September quarter, while the aggregate value of these holdings shrank by about 8%. Amicus Therapeutics, Inc. (NASDAQ:FOLD)’s stock dropped by about 2% during the same period, but is still up by more than 12% so far this year. In early October, the company announced that, contrary to its previous claim, it will not be able to submit the New Drug Application for its oral small molecule pharmacological chaperone migalastat for the treatment of Fabry disease in the fourth quarter. Shares slumped by as much as 54% on the news. Joseph Edelman‘s Perceptive Advisors holds about 14.44 million shares of Amicus Therapeutics, Inc. (NASDAQ:FOLD).
#3 Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA)
Investors with Long Positions (as of September 30): 29
Aggregate Value of Investors’ Holdings (as of September 30): $232.65 Million
At the end of September, hedgies held about 21.1% of Ariad’s float. While the total number of firms holding Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) in their portfolios decreased by two during the third quarter, the corresponding drop in the aggregate value of holdings was 42%. The stock depreciated by more than 27% during the same period. Currently, the stock is trading just around 7% above its 52 week-low level. Sarissa Capital Management, led by Alex Denner, owns 12.85 million shares of Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) as of the end of September. Recently, the company’s shares have fallen sharply when it lowered the 2015 guidance for its leukemia drug Iclusig, owing to continuing negotiations with the French authorities about the drug’s pricing and reimbursement.
#2 Synergy Pharmaceuticals Inc (NASDAQ:SGYP)
Investors with Long Positions (as of September 30): 31
Aggregate Value of Investors’ Holdings (as of September 30): $134.64 Million
The total number of hedge funds holding the company remained unchanged during the July-September period, but the aggregate value of these holdings slid by 25%. The stock price of the $679.54 million biopharmaceutical company focused on treatment of gastrointestinal disorders cratered by 38% during this period. Collectively hedgies held about 22.6% of Synergy Pharmaceuticals Inc (NASDAQ:SGYP)’s outstanding shares at the end of September. John Paulson‘s Paulson & Co hiked its stake in Synergy Pharmaceuticals Inc (NASDAQ:SGYP) by 56% to 9 million shares during the third quarter. The company recently appointed Gary Sender as its new Chief Financial Officer, and plans to launch its late-stage product, plecanatide, in early 2017.
#1 Rite Aid Corporation (NYSE:RAD)
Investors with Long Positions (as of September 30): 46
Aggregate Value of Investors’ Holdings (as of September 30): $1 Billion
The $8.11 billion drugstore chain is set to be acquired by rival Walgreens in an all-cash transaction, valued at $17.2 billion. During the third quarter, Rite Aid Corporation (NYSE:RAD)’s stock price fell by more than 26%. While the number of investors holding the stock in their portfolios fell by nine during the same period, the value of their holdings slid by $31 million. Jeremy Green‘s Redmile Group heads the list of Rite Aid Corporation (NYSE:RAD)’s investors holding about 8.07 million shares. JP Morgan downgraded the retail drugstore chain to ‘Neutral’ from ‘Overweight’ last month and set a price target of $9, which provides an upside of 13% to the current trading levels.