Arthur B. Cohen and Joseph Healey‘s HealthCor Management has nearly $2.6 billion worth of regulatory assets under its management. The healthcare-focused fund, which has 85% of its equity portfolio invested in healthcare stocks as of September 30, posted losses of over 10% during September, when the market reacted strongly to Hillary Clinton’s resolve to curb high drug prices, sending the healthcare sector plunging. HealthCor’s top equity picks as disclosed in the fund’s latest 13F filing can provide valuable insight into its conviction picks coming out of this turbulent period, which is why we’ll go through its top stocks in this article.
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 have 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 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 Abbott Laboratories (NYSE:ABT)
– Shares held (as of September 30): 2.25 million
– Total Value (as of September 30): $90.50 million
During the third trimester, HealthCor acquired some 2.02 million shares of Abbott Laboratories (NYSE:ABT). The stock price of the $65.86 billion healthcare company has slid by about 2% so far this year. Goldman Sachs downgraded the company to ‘Neutral’ from ‘Buy’ in mid-November, but maintained its price target of $48, which provides an upside of about 9%. Among the greater than 700 hedge funds that we track, Ric Dillon‘s Diamond Hill Capital is the largest stockholder of Abbott Laboratories (NYSE:ABT), owning about 8.38 million shares.
#4 C R Bard Inc (NYSE:BCR)
– Shares held (as of September 30): 550,000
– Total Value (as of September 30): $102.47 million
HealthCor boosted its stake in C R Brand by 15% during the July-to-September quarter. The stock of the medical equipment company has posted gains of nearly 10% since the start of the year. Recently, the company entered into a definitive agreement to acquire Liberator Medical Holdings Inc (NYSEMKT:LBMH) for $181 million. The purchase price represented a premium of 36% over Liberator’s stock price prior to the announcement. The transaction, which is still awaiting shareholder approval from Liberator’s side, is expected to close in the first quarter of 2016. Donald Yacktman‘s Yacktman Asset Management is the largest stockholder of C R Bard Inc (NYSE:BCR) within our database, holding more than 1.46 million shares valued at $272.8 million.
#3 Stericycle Inc (NASDAQ:SRCL)
– Shares held (as of September 30): 775,000
– Total Value (as of September 30): $107.97 million
A new stake in Stericycle represented about 6.08% of HealthCor’s public equity portfolio on September 30. HealthCor’s bullishness was just the tip of the positive sentiment iceberg, as there was overwhelming enthusiasm for the company in the third quarter among the hedge funds that we track. At the end of September a total of 34 firms had investments worth $413.25 million in the company, compared to 18 firms with $129.88 million in shares at the end of June. However, Stericycle Inc (NASDAQ:SRCL)’s stock tanked by more than 18% in October when the company failed to meet its guidance for the third quarter. The main issues being foreign exchange losses, lower hazardous-waste volumes, and higher-than-expected expenses. Impax Asset Management, which is managed by Ian Simm, owns about 313,400 shares of Stericycle Inc (NASDAQ:SRCL).
#2 Edwards Lifesciences Corp (NYSE:EW)
– Shares held (as of September 30): 775,000
– Total Value (as of September 30): $110.18 million
HealthCor slashed its stake in the $16.98 billion medical device company focused on heart valve therapies by 29% during the third trimester. The stock has climbed by more than 5% since the end of September and is up by nearly 24% so far this year. In its financial results for the third quarter, Edwards Lifesciences Corp (NYSE:EW) reported EPS of $1.07, which was $0.09 higher than analyst estimates, while quarterly revenue of $615.5 million also came in $17.21 million higher than expectations. Ken Griffin‘s Citadel Investment Group tops our list of Edwards Lifesciences Corp (NYSE:EW)’s stockholders, as it owns about 2.22 million shares of the company.
#1 Allergan PLC (NYSE:AGN)
– Shares held (as of September 30): 475,000
– Total Value (as of September 30): $129.11 million
During the September quarter, HealthCor bulked up its Allergan position by adding some 447,500 shares to it. Formerly known as Actavis, the Irish-domiciled, ‘acquisition-happy’ company is seeking to create attractive long-term assets while minimizing the risky R&D spend that is ubiquitous in the healthcare sector, according to one of Dan Loeb’s investor letters earlier this year. Allergan PLC (NYSE:AGN) has continued on this trajectory in a big way, as it recently announced its $160 billion merger with Pfizer Inc. (NYSE:PFE), which stands as the largest transaction ever in the healthcare sector, and the second-biggest deal of all time. Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital hiked its stake in Allergan PLC (NYSE:AGN) to about 592,500 shares in the third quarter.