Michael Castor predicted the coronavirus pandemic when most investors were dismissing the threat. S&P 500 Index lost nearly 20% during the first quarter, yet Castor’s healthcare focused hedge fund Sio Capital returned more than 7% during the same period.
Most equity hedge funds aren’t truly hedge funds. They are almost never 100% hedged. That’s because they can’t generate pure alpha high enough to justify their 2-and-20 fee structure. A typical hedge fund manager these days can outperform the market by an average of 2-3 percentage points in its long portfolio. So, if the market returns 10%, a typical hedge fund will probably return 12-13%. This isn’t bad, but no investor in their right mind would pay 2% fixed annual fee plus a 20% performance fee for such a performance (the net return would fall to 8% after these outrageous fees). So, they try to confuse investors by reducing their net exposure to 50% and claiming that what they return is pure alpha.
Michael Castor isn’t like this. On average his portfolio has been actually 5-10% net short over the last 7-8 years. His fund returned more than 11% annually over this period and all of this is pure alpha. There are very few hedge fund managers left who can deliver this type of alpha over very long periods of time.
We interviewed Michael Castor this weekend and shared the video below. In the first half of this video we talked about Sio Capital, markets, and the coronavirus pandemic. We shared his views on Gilead and efficacy of remdesivir earlier today here. “We’re actually at probably our max short position. I’m finding very little that’s cheap and a large number of stocks that are outrageously expensive,” Castor said in the interview below.
The second half of the video was dedicated to Michael Castor’s opinions on most of the large healthcare stocks. We asked him about the health insurance stocks like Anthem Inc (NYSE:ANTM) and UnitedHealth Group Incorporated (NYSE:UNH). Castor said he has a slight preference for Anthem Inc over UnitedHealth Group Incorporated. He thinks UnitedHealth has the advantage of having a diversified base of income (providing not only insurance but healthcare IT, analytics, and consulting businesses), however Anthem Inc is slightly more attractive. Sio Capital currently have positions in both stocks.
Castor also revealed in the interview that he is fond of Molina Healthcare, Inc. (NYSE:MOH). Molina Healthcare serves the Medicaid population and Castor thinks Molina Healthcare will benefit from the increasing number of people who now qualify for Medicaid because of huge job losses. “Molina is poised to really benefit from those,” Castor said.
We also questioned Castor about hospital stocks because hospital stocks such as HCA Healthcare, Inc. (NYSE:HCA) and Universal Health Services, Inc. (NYSE:UHS) lost about 25% year-to-date. Castor said COVID-19 is a disaster for hospitals because they are losing massive amounts of money. Their profit centers (elective surgeries, cardiology, and orthopedics) can’t operate, yet their costs went up because of additional measures to prevent the spread of COVID-19 inside the hospitals. The near-term outlook for hospitals is bleak, but Castor doesn’t think especially community hospitals will be allowed to go bankrupt.
In terms of individual stocks Castor thinks HCA Healthcare Inc is “by far is the best run of any hospital chain that I have come across”. HCA Healthcare won’t avoid a drop in profit but other hospitals will be in worse shape. Castor expects HCA to take advantage of the aftermath of the pandemic and pick up some assets on the cheap.
He also shared his best U.S. and European healthcare stock ideas with us. You can find out the name of his top European stock towards the end of the interview. We have been recommending a position in his top U.S. healthcare stock pick in our monthly newsletter, so I had to cut that part of the video out. However, you can still find out his top European healthcare stock pick which he expects to double.
If you are interested in finding out Michael Castor’s top healthcare stock pick, please subscribe to our monthly newsletter. The portfolio of our stock recommendations in the monthly newsletter returned 71.8% since March 2017 (through April 28th) vs. 27.9% gain for the S&P 500 ETFs. There aren’t a lot of fund managers whose picks beat the market by 44 percentage points in the last 3 years.
Disclosure: No positions in HCA Healthcare, Inc. (NYSE:HCA), Universal Health Services, Inc. (NYSE:UHS), Molina Healthcare, Inc. (NYSE:MOH), Anthem Inc (NYSE:ANTM) and UnitedHealth Group Incorporated (NYSE:UNH). This article is originally published at Insider Monkey.