There are thousands of hedge funds in action today–about 8,000 to be exact–but there are those that stand out amongst the crowd. Michael Castor’s Sio Capital is one such stand-out, and we’ve chronicled his mastery of Mr. Market before.
On MarketWatch in March, under the title “3 stock picks from the next David Einhorn,” and on our site as well (see the article here), we discussed Michael Castor’s love for three companies: Cardinal Health Inc (NYSE:CAH), NPS Pharmaceuticals, Inc. (NASDAQ:NPSP), and Anacor Pharmaceuticals Inc (NASDAQ:ANAC).
Image: Courtesy of Sio Capital
Since publishing that article on March 29th, here are the returns for this trio:
Cardinal Health, +22.0%
NPS Pharmaceuticals, +86.4%
Anacor Pharmaceuticals, +16.0%
For any reader keeping score at home, the S&P 500 returned 8.3% over that same time period, meaning that on average, Michael Castor’s three favorite stock picks beat the market by just over 33% in four and a half months.
What’s his next big stock pick?
Michael Castor will be presenting his latest investment idea at the 9th New York Annual Value Investing Congress, the event CNBC dubbed “The Superbowl of Value Investing.” The event takes place September 16 & 17, 2013 at Jazz at Lincoln Center’s Fredrick P. Rose Hall and some of the world’s most successful investors are slated to attend, including Jeff Ubben, Mick McGuire, and Alex Roepers, to name a few. In addition, this year’s event will feature a special presentation by Tyler and Cameron Winklevoss. The early bird price expires on July 30th – to take advantage of significant savings, including a special Insider Monkey discount, go to www.ValueInvestingCongress.com/InsiderMonkey and use discount code N13IME1.
In the meantime, let’s take a look at the Sio Capital manager’s thoughts about each of the three aforementioned healthcare companies, and if you can expect similar outperformance over the next few months.
Regarding Cardinal Health Inc (NYSE:CAH), Michael Castor said that the stock’s valuation was attractive at 12 times earnings, and after its double-digit gain, shares still trade at a cheap forward P/E of 14.4. As Castor predicted, Cardinal Health did renew its ‘bulk’ contract with CVS in late April, which meant that a decent portion of risk is now alleviated.
In March, the hedge fund manager said that even if the deal went south, the company was still a “great stable business,” adding “it’s a tremendous cash-flow generator and so the combination of attractive valuation, an investment story that just makes sense to me, expectation of meeting their earnings targets and potentially even upward revision to their earnings estimates on the removal of this overhang.” In short, he shared that this “constellation of factors makes Cardinal Health Inc (NYSE:CAH) [his] favorite investment right now.”
In the case of NPS Pharmaceuticals, Inc. (NASDAQ:NPSP), this was probably the most unknown of Michael Castor’s, due to its sub-$2 billion market capitalization. Up 86.4% since our piece was published and 102.5% year-to-date, NPS Pharmaceuticals “has three legs that really underpin their revenue” according to the fund manager. “The first one is a set of royalties that they get, with the biggest being on Sensipar, a drug sold by Amgen,” while the “second source of revenue is a drug that is just now being launched for an indication called short-bowel syndrome,” and the “last drug that is still in the pipeline is for people who have had damage to their parathyroid glands.”
Castor adds that NPS Pharmaceuticals, Inc. (NASDAQ:NPSP)’s profitability–by keeping spending down–is an added bonus that investors can get with the small pharma company, and he’s 110% correct. Wall Street expects NPS to generate earnings of $0.43 next year, which would be an increase of more than threefold from the previous year. Over the longer term, the sell-side predicts the company to sport annual earnings growth of 34% a year over the next half-decade. This forecast puts NPS fourth-highest in the entire 199-company biotechnology industry in this category.
A little bit of both
With a 16% return over the 4.5 month time period we mentioned above, Anacor Pharmaceuticals Inc (NASDAQ:ANAC) was the lowest-yielding stock of the bunch, but it still nearly doubled the market’s return. Anacor isn’t particularly expensive at 7.9 times cash and it has grown its bottom line by 27% a year over the past five years, and according to Castor and his team, they “foresee four ways to win” with the stock. Specifically, these four potential catalysts are: (1) a “drug to treat toenail fungus,” (2) a suit with Valeant Pharmaceuticals, (3) “a topical cream to treat atopic dermatitis,” and (4) potential royalties from Eli Lilly for two animal health products.
It’s hard not to like each of Michael Castor’s three favorite healthcare stocks for the remainder of 2013, and we’d expect that you’ll be hearing much more from him in the coming years. In particular, we’d pay very close attention to what he has to say at the 9th New York Annual Value Investing Congress, which you can sign up for above.