How Did Michael Castor’s Picks Play Out in Q4?

Chances are that some people have not heard of Michael Castor or his healthcare-focused hedge fund Sio Capital. Mr. Castor started Sio Capital in 2006 after working for five years at Bernstein Investment Research and Management. Prior to that, he worked in the investment banking/equity capital markets division of JP Morgan. He holds an MD from Ohio State University College of Medicine and before entering the field of finance in mid 2000 used to be a surgeon. Since its inception in 2006 and till 2013, Sio Capital generated an average annual return of 10.4% versus the S&P 500 Total Return Index’s return of 3.8%. The surprising thing behind that outperformance was that it was generated while remaining nearly market neutral with a portfolio beta of only 0.15. The fund continued with that outperformance in 2014 by generating over 20% in returns.

We at Insider Monkey consistently track Sio Capital’s portfolio because several of the fund’s stock picks have become multibaggers in the past and the fund continues to outperform most of its peers without taking any undue risks. According to Sio Capital’s last submitted 13F filing, its US equity portfolio at the end of September was worth $145.9 million, almost 28% lower than the $202.4 million it was worth at the end of June. The filing also revealed that during the third quarter the Sio Capital’s portfolio saw a very high turnover of 73.53%. In this article we will be looking at the performance of Sio Capital’s top five equity holdings – which in aggregate accounted for 36.7% of the value of the fund’s equity portfolio at the end of September- during the final quarter of 2015 and analyze whether the fund made the right decision by betting on them.

An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like a hedge fund can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests, whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012 (read the details here).

#5 Cardinal Health Inc (NYSE:CAH)

– Shares Owned by Sio Capital (as of September 30): 94,868

– Value of Holding (as of September 30): $7.29 million

Although shares of Cardinal Health Inc (NYSE:CAH) mostly remained in the $80-$90 range throughout 2015, starting the fourth quarter relatively low helped them to end the three-month period with gains of 16%. Cardinal Health Inc (NYSE:CAH) has been among Sio Capital’s favorite stock picks since 2013. Most of the gains the stock made during the fourth quarter came before the company declared its fiscal 2016 first quarter results on November 2. Since Cardinal Health beat analysts’ expectations of EPS of $1.10 on revenue of $27.19 billion by reporting EPS of $1.38 on revenue of $28.10 billion, its stock managed to sustain those gains.

The acquisition-driven growth strategy that Cardinal Health has followed seems to be working wonderfully for the firm as it has managed to beat analysts’ expectations for several quarters in a row. On December 21, the company announced that its naviHealth subsidiary has completed the acquisition of RightCare Solutions, although it didn’t disclose the financial terms of the deal. This announcement came just two months after the company had reported the completion of its acquisition of Johnson & Johnson’s Cordis business unit for $1.944 billion. Billionaire Jim Simons‘ Renaissance Technologies was one of the hedge funds that initiated a stake in Cardinal Health during the third quarter; it purchased 685,700 shares of the company.