I usually don’t give away my best stock idea but from time to time I’d also like to give something valuable back to the subscribers who are powering this website. We launched our quarterly newsletter more than 2 years ago and not one subscriber has said “I lost money by EXACTLY following your stock picks”. The reason is simple. The stock picks of our quarterly newsletter returned 97.2% during the 26 months since the end of August 2012 (see the details here). Both the S&P 500 ETF (SPY) and the Russell 2000 (ETF) returned less than 50% during the same period. Because of these results, our quarterly newsletter is extremely popular among investors.
We use two different approaches to pick stocks. I don’t have a team of analysts who can spend weeks analyzing the suitability of an investment idea. I bet that you don’t have the time nor resources to do your own analysis. The cost of thorough stock analysis is extremely high and it doesn’t guarantee superior returns anyway.
There are hedge funds with more money than God who spend millions on obtaining information (both legally or illegally) before making their investment decisions. They aren’t stupid either. They have degrees from the World’s most elite colleges and they know that they will be filthy rich if they are able to beat the market with their stock picks. There are thousands of hedge funds with tens of thousands of analysts. I can’t outspend them and I can’t outwork them.
Fortunately I don’t have to outspend them to beat them. The trick I use is to identify the best ideas of the best hedge fund managers. How do I do that?
As I said earlier, I have two different approaches. The first one is presented in our quarterly newsletter. I have a PhD in financial economics and developed a quantitative investment strategy that tries to identify the best stock picks of more than 700 hedge funds and narrow down the list to only 15 stocks every quarter.
I backtested this strategy and found that it outperformed the market by an average of 18 percentage points per year during a 10-year period. I am an expert in backtesting and took extraordinary precautions to avoid several pitfalls (like survivorship bias or selection bias) that most researchers knowingly or unknowingly fall into.
However, you should never invest in a strategy solely based on the backtested results. You should understand why the strategy was working and verify that it is still working today.
Our strategy outperformed the market by more than 47 percentage points in 26 months and this is in line with its backtested results.
Our strategy works because it identifies the best stock picks of the best hedge fund managers at an extremely high accuracy. Our strategy works because it invests in smaller cap stocks that are followed by only a few analysts, that are inefficiently priced, and that are misunderstood by the mainstream institutional investors.
Our number one stock pick was United Rentals (URI) 26 months ago and it remained our number one stock pick for a year. We first picked it at $32 when it was trading at 7 times earnings. Most investors didn’t really understood this stock and didn’t care as it had a market cap of only $3 billion.
Today United Rentals trade at $113 and has a market cap of $11 billion. We were able to identify several stocks like United Rentals that crushed the market and managed to nearly double our subscribers’ portfolios in the past 26 months. We will share the new stock picks of this strategy this week. You can download a sample issue of this newsletter here.
The second approach we use to pick stocks is way better than our market crushing small-cap strategy that we share in our quarterly newsletter. It is way better because it directly gets the best stock ideas from the best hedge fund managers themselves. We started publishing our monthly newsletter after identifying one of those best hedge fund managers in the World.
We revealed the identity of this hedge fund manager in a March 2013 Marketwatch article titled 3 Stock Picks From The Next David Einhorn. I quantitatively analyzed the historical returns of this fund manager, interviewed him, and tracked the performance of his best ideas before dubbing him “The Next David Einhorn”.
You probably never heard his name: Michael Castor of Sio Capital.
Michael Castor is a medical doctor (he used to be a surgeon) by training, but switched to finance in mid 2000. He worked as a health-care analyst at JPMorgan and Bernstein Investment Research and Management until he launched Sio Capital in 2006. At that time Sio Capital returned 10.4% a year since its inception vs. 3.8% average annual gain for the S&P 500 Total Return Index during the same period.
We liked Michael Castor because he achieved a 6.6 percentage-point outperformance with a nearly market neutral portfolio. Sio Capital’s beta was 0.15 since inception. Sio Capital was also 12% net short in 2012, yet it returned 14.9% after fees and expenses.
Michael Castor shared three investment ideas with us in late February 2013. We shared those ideas in the Marketwatch article. First idea was Cardinal Health (CAH). It went up more than 60% since that interview. Guess what? This was also Castor’s worst performing pick among the three he shared with us.
The second investment idea that Castor shared with us was NPS Pharma (NPS). It was trading below $8 at the time. Today, the stock is trading at $27. A return of 250%!!
The third investment idea that we shared in that Marketwatch article was Anacar Pharma (ANAC). Anacor was trading at $3.27 on the day we interviewed Michael Castor. Today it is trading at $28.
It returned a whopping 800%!!! Who would have a guessed an ordinary Marketwatch article would reveal three market crushing stock picks. This article shows that it may be possible to identify truly talented hedge fund managers in advance.
This is just the beginning of the story.
In June 2013, we interviewed Michael Castor one more time and published this interview in the first issue of our monthly newsletter. You can download a free copy of this newsletter here.
Michael Castor picked two stocks in that interview. The first stock is Rockwell Medical (RMTI) which was trading at $4.09 at the time we published the newsletter. Nobody had any respect for Castor’s stock picks at that time. Rockwell Medical went down to $3.40 within a month, so investors had plenty of opportunities to buy this stock cheaply. Rockwell Medical took off after July and today it trades at north of $10. Castor sold this stock at around $8 for a 100% return.
The second stock Castor picked in June 2013 was Mazor Robotics (MZOR). This stock was trading at $11.35 when Castor recommended it and it went up as high as $25 in less than a year. Castor also sold this stock at low $20s for a gain of 100%.
After these picks succeeded we had a few subscribers thanking us. One of them sent us a bottle of expensive wine. Unfortunately nobody has a 100% betting average in investing. In September Michael Castor picked Aratana Therapeutics (PETX) when it was trading at $15. The stock quickly climbed all the way up to $28. However, Castor never told us to exit this stock pick (he still owns it) and the stock currently trades at $11. We consider this pick as a 25% loser.
At the beginning of October 2013 Castor picked Galena Biopharma (GALE) at $2.40. This stock climbed as high as $7, however Castor sold it around $3.50 for a 50% gain.
One of the best picks of Michael Castor came in mid December 2013: Furiex (FURX). Furiex was trading at $40 at the time. By early February it jumped above $100 and was later taken over by Forest Labs for $105. A gain of 160%.
This year Castor picked 4 stocks for us. One in January, one in February, and two in August. We won’t reveal the name of the January pick because this stock has a long way to go even though it is up more than 60%.
I will reveal the name of Castor’s February pick shortly.
I also won’t reveal the names of his August picks because these picks are fairly new and they are only up a few percentage points. It isn’t late to buy these names because Castor thinks they have 200-300% upside potential.
You have to subscribe to our monthly newsletter to find out. You can sign up here.
As a thank you gift just for being a reader, I am going to share Michael Castor’s February 2014 stock pick. Michael Castor’s best ideas crushed the market on average because Michael Castor has unique sets of skills and resources that most investors don’t have. However, the most critical component of the puzzle is that Michael Castor has been sharing his “best” ideas with us. His fund is very small, $170 million in assets under management and he is trying to build a reputation as a solid biotech investor. He has done a fantastic job so far.
Michael Castor picked BioDelivery Sciences (BDSI) in early February and maintained since then that this is his best idea. The stock was trading below $9 at the time. It traded as low as $7 in April during a market decline. Here is what Castor said about BDSI in February:
Biodelivery Sciences (BDSI) specializes in developing narcotic drugs (pain killers). One of their key drugs, which is partnered with Endo had positive clinical results (the drug was shown to be highly effective). BDSI at the time had a market cap of a bit over $200 million. BDSI earns a mid to high teens royalty on this drug. Anticipating sales of approximately $200 million, this translates into operating income (via a royalty stream) of about $35 million/year for BDSI. A typical royalty stream is pure profit and can be valued at approximately 5-7x sales, so this is worth $150 million. The market was alerted to BDSI’s meaningful undervaluation and the stock moved up.
In addition, BDSI has three other drugs in late stage development. One of these (and the biggest value driver in our opinion) is Bunavail, to treat opioid addiction. The existing drug on the market for this indication, Suboxone, has sales of approximately $1.5 billion. BDSI’s drug is easier to use and likely to have lower incidence of side effects. If BDSI can capture 10% of the market, revenues of $150 million would justify a valuation of $450 million (using a 3x sales multiple). We think that such sales are achievable. Bunavail has been submitted to the FDA and has a target approval date in June 2014. BDSI’s third drug is Onsolis, an FDA-approved oral agent for cancer breakthrough pain. Other companies marketing similar products include Insys [INSY] and Galena [GALE], both of which have valuations of several hundred million dollars for their similar products. BDSI will begin marketing Onsolis later this year. Finally, BDSI is developing a topical drug for neuropathic pain (the pain caused by nerve damage associated with diabetes). We view this as high risk, but BDSI’s valuation is supported many times over by its other aforementioned products.
Bunavail was approved in June and BioDelivery Sciences took off. Today it is trading at $15.50. It is up more than 70% since February but you aren’t late to the party.
Castor thinks BDSI will reach $25-$30. It would have been perfect if you could have bought this stock while it was still trading at $9.
Luckily we have two other recent recommendations by Michael Castor that are still trading only a few percentage points above Michael Castor’s recommendation price. You can sign up now to find out these stocks, as well as Michael Castor’s current investment thesis in BioDelivery Sciences.
BioDelivery Sciences is also the biggest position in my personal portfolio. I also have a much smaller position in Aratana Therapeutics (PETX). I invest in the stock picks of our quarterly newsletter and I also invest in the 0-2 stocks that we share in our monthly newsletters.
You can get the names of Castor’s other stock picks as well as our new quarterly stock picks that outperformed the market by more than 47 percentage points in the past 26 months by signing up NOW.
You can subscribe to both of our quarterly and monthly newsletters for only $419/year. If you subscribe to both newsletters separately it costs $629/year. You save 33% by signing up today. Sign up NOW!