Although a great movie, The Wolf of Wall Street left many people thinking penny stocks are somewhat ‘untouchable’. Now, it is true that the risk implied in such equities is higher than that of companies with larger market capitalizations; but so is the potential reward. In order to balance these two profiles, risk and reward, investors must do their due diligence, taking a detailed look into a business, its fundamentals, and its prospects in its industry and given the competition it faces. However, an everyday investor doesn’t have the same resources and capabilities to analyze different publicly-traded companies that hedge funds do. This is why it is a good idea to see what stocks hedge funds like the most and try to imitate some of their bullish moves in an attempt to reap market-beating returns. In this article we’ll reveal the five most popular healthcare stocks among the group of elite hedge funds that we track which are currently trading for less than a dollar per share.
In our backtests, a portfolio of the 15 most popular small-cap stocks generated monthly alpha of 81 basis points, versus 0.7 percentage points posted by hedge funds’ top large- and mega-cap picks (see more details here).
Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS)
Let’s start with Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS), which had nine hedge funds in our system invested in it at the end of the first quarter of 2016, up by one quarter-over-quarter. Their combined stakes, valued at roughly $14.7 million as of March 31, represented almost one-third of the company’s float.
Jeffrey Jay and David Kroin’s Great Point Partners held the largest stake in the company among institutional investors, amounting to 8.25 million shares worth almost $4.5 million at the end of the first quarter. Another large position was held by William Leland Edwards’ Palo Alto Investors, which owned 6.97 million shares. Finally, the company counted the support of healthcare-focused fund Baker Bros. Advisors. The firm, run by Julian Baker and Felix Baker, disclosed ownership of 4.45 million shares of the micro-cap, which reported a first quarter net loss of $0.12 per share, in-line with the consensus estimate, on revenue of $640,000, down by 24.7% year-over-year, and $360,000 below expectations. Shares of Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS) are down more than 35% year-to-date and currently trade at $0.57.
Threshold Pharmaceuticals, Inc. (NASDAQ:THLD)
Next up is Threshold Pharmaceuticals, Inc. (NASDAQ:THLD), which is down by 1.65% since the beginning of the year, and whose shares trade at $0.47. The FDA said earlier this week that the results from the company’s Phase 3 clinical trial, EMR200592-001, and its Phase 2 study, TH-CR-404, did not provide adequate efficacy data to support a New Drug Application (NDA) for the approval of evofosfamide as a treatment for patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy.
Among the funds that we track, nine were long Threshold Pharmaceuticals, Inc. (NASDAQ:THLD) at the end of the first quarter and held about 15.7% of the company’s shares. The largest institutional investor was one of Insider Monkey’s favorites, due to its outstanding performance; Michael Castor’s Sio Capital, which disclosed ownership of 3.95 million shares, or about $1.8 million in stock, as of March 31. Phill Gross and Robert Atchinson’s Adage Capital Management owned 3.5 million shares, while Jim Simons’ Renaissance Technologies owned 1.01 million shares.
We run through three more popular healthcare penny stocks on the next page.
Catalyst Pharmaceuticals Inc (NASDAQ:CPRX)
Same as its peers on the previous page, Catalyst Pharmaceuticals Inc (NASDAQ:CPRX) counted nine hedge funds in our database as supporters as of the end of the first quarter, with their combined stakes accounting for more than 20% of the float. Notable was the stake owned by Kevin Kotler’s Broadfin Capital, which took advantage of a heavily depressed stock price early in 2016 to almost double its stake to 8.2 million shares as of March 31. Once again, Baker Bros. Advisors was also among the largest investors of record, with almost 5.5 million shares.
Catalyst Pharmaceuticals Inc (NASDAQ:CPRX) has widely underperformed the market, tumbling by almost 73% since the year started, and by about 43.3% in the second quarter alone, dragging its shares down to $0.67. A few weeks ago, the company announced it was firing 30% of its workforce, effective immediately, in order to preserve its cash resources after the FDA said the firm needed a new Phase 3 study to support its Firdapse (amifampridine) NDA.
Epirus Biopharmaceuticals Inc (NASDAQ:EPRS)
Guess how many hedge funds in our database were long Epirus Biopharmaceuticals Inc (NASDAQ:EPRS) on March 31…Yes, the answer is nine! And, yet again, their combined stakes accounted for roughly 20% of the company’s outstanding shares. Broadfin Capital and Adage Capital were among the top hedge fund investors in the stock, with 1.07 million shares and 772,007 shares, respectively. However, Camber Capital Management’s position was larger; Stephen Dubois’s fund declared holding 1.84 million shares of the company worth almost $5 million as of the end of March.
Epirus Biopharmaceuticals Inc (NASDAQ:EPRS) is down by more than 77% year-to-date, with most of the losses coming in the second quarter, mostly driven by news of a reprioritization of the company’s pipeline, the replacement of its CEO, and a reduction of up to 40% of its workforce. Shares currently trade at just $0.68.
Orexigen Therapeutics, Inc. (NASDAQ:OREX)
Finally, there’s Orexigen Therapeutics, Inc. (NASDAQ:OREX), which also counted nine hedge fund supporters in our database. Their combined stakes accounted for roughly 23.6% of the company’s shares, with Seth Klarman’s Baupost Group alone holding more than 15% of the float. Its stake comprised 22.26 million shares, up from just 2.26 million shares at the end of 2015.
Orexigen Therapeutics, Inc. (NASDAQ:OREX) has also had a tough 2016, having lost more than 62% year-to-date, pulling its shares down to $0.53. However, the losses were largely realized in the first quarter. They spiked yesterday by 51.56% after the issuance of a favorable Markman ruling against Actavis (now Allergan plc Ordinary Shares (NYSE:AGN)) concerning Orexigen’s patents for Contrave. Actavis was trying to market a generic version of the drug with the same dosage.
Disclosure: Javier Hasse holds no positions in any of the securities mentioned in this article.