Considering that the pharmaceutical industry is down by about 5% on average so far this year one might wonder what is the rationale behind seeking out investment candidates in this domain. On the contrary, the slide experienced by the industry provides the “raison d’etre” for value investing, which is designed to take advantage of temporary setbacks beleaguering a particular sector or company. Not all setbacks are temporary, however, and in order to avoid that pitfall we have compiled a list of pharmaceutical companies that boast of the highest interest from hedge funds, which have performed rigorous research on these firms before giving them a place in their portfolios.
We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).
Valeant Pharmaceuticals Intl Inc (NYSE:VRX)
– Investors with Long Positions (as of March 31): 71
– Aggregate Value of Investors’ Holdings (as of March 31): $3.15 Billion
The fallen specialty pharmaceutical and medical device company is still a popular choice among hedge funds, especially at the current trading levels, which puts Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s forward earnings multiple at just 2.3. However, the total number of hedgies who held long positions in Valeant dropped by 12 during the first trimester. Boykin Curry‘s Eagle Capital Management cut its stake in the company by 13% to 5.90 million shares during that period. Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s new CEO Joseph Papa is looking to stage a comeback and plans to deleverage the company by more than $1.5 billion in 2016. According to Bloomberg, he is looking to sell Provenge, Valeant’s treatment for advanced prostate cancer, and Obagi Medical Products, the dermatology company.
Johnson & Johnson (NYSE:JNJ)
– Investors with Long Positions (as of March 31): 77
– Aggregate Value of Investors’ Holdings (as of March 31): $5.25 Billion
While the number of hedge funds holding shares of the $308 billion pharmaceutical company increased by five during the first three months of this year the subsequent rise in the aggregate value of their investments amounted to 26%, which is significantly higher than the 5% appreciation of Johnson & Johnson (NYSE:JNJ)’s stock price during the same period. The New Brunswick-based company recently closed an underwriting agreement with a lineup of big banks for 4 billion euro ($4.46 billion) aggregate principal amount of debt. BTIG recently downgraded Johnson & Johnson to ‘Neutral’ from ‘Buy’ over concerns that the transformational medical device acquisition that could have helped the company diversify away from over-the-counter and oncology drugs might be off the cards now that valuations of many such companies including Edwards Life sciences do not look cheap. With 10.85 million shares valued at $1.19 billion, Ken Fisher‘s Fisher Asset Management is the largest stockholder of Johnson & Johnson (NYSE:JNJ) within our database.