Should You Follow This Investor Into His Biotech Picks?

For the last year or so, many investors have been seeking profitable opportunities in the biotech sector, which has sent the shares of many stocks higher. However, a lot of this appreciation is based only on trends rather than on the real value of these companies. This makes things more complicated for retail investors, as it has become more difficult to find really good stocks to invest in. In a situation like this, a good start is to look at the hedge funds that invest in these companies, because hedge funds usually commit a lot of resources and effort while making their stock picks.

An investor that knows a thing or two about the biotech industry is Louis Navellier of Navellier & Associates. Navellier & Associates has recently revealed its equity portfolio as of the end of September, which showed that the fund cut its exposure to stocks heading into the fourth quarter. Navellier holds a very diversified portfolio with over 300 positions and between July and September, the investor sold out of more than 80 stocks, and cut its exposure to a further 164 companies. On the other hand, it initiated 52 new positions and raised its stakes in 96 previously existing ones. The total value of the fund’s equity portfolio stood at $993.16 million at the end of September, down from $1.14 billion a quarter earlier, while the healthcare sector amassed around 20% of the portfolio’s value, one of the largest shares. In this article, we are going to take a look at some of Navellier’s biotech picks heading into the fourth quarter.

What’s important to mention is that amid the broader market sell-off in August, Navellier significantly cut his exposure to some of the stocks that we are going to cover here. In this way, in Biogen Inc (NASDAQ:BIIB), the fund reported ownership of just 4,746 shares, down by 93% on the quarter. The stock slid by 28% during the third quarter and has lost 18% since the beginning of 2015. It currently trades at 15.9-times forward earnings, which is below the S&P 500’s forward P/E of 17.xx. In this way, the stock is trading relatively cheap and the company’s future returns might be better-than-expected. The most recent quarterly results of Biogen Inc (NASDAQ:BIIB) were positive, with earnings per share of $4.48, above estimates of $3.77, while its sales came in at $2.78 billion, versus expectations of $2.64 billion. The company has also embarked on a cost-cutting campaign, which will involve the lay-off of around 11% of its workforce. Billionaire Ken Fisher‘s Fisher Asset Management is more bullish on Biogen Inc (NASDAQ:BIIB), reporting ownership of 112,448 shares in its 13F for the third quarter, up by 31,516 shares over the period.

Professional investors like Navellier spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned 102% and beaten the market by more than 53 percentage points since the end of August 2012 (see the details).

In China Biologic Products Inc (NASDAQ:CBPO), Navellier inched down his position by 4% to 14,953 shares. The stock was one of the investor’s profitable bets, advancing by over 88% over the last 52 weeks (the position was initiated during the fourth quarter of 2014). Earlier this month, Credit Suisse initiated coverage on China Biologic Products Inc (NASDAQ:CBPO) with an ‘Outperform’ rating and the overall outlook from analysts is positive, with a consensus price target north of $143, which represents upside of 46%. China Biologic Products Inc (NASDAQ:CBPO) is also one of the favorite picks of Visium Asset Management, which held 500,259 shares at the end of June.

Three more of Navellier’s top biotech stock picks are detailed on the coming page.

After having initiated a stake in the company during the first quarter, and further increasing it in the second, Navellier reported ownership of 25,615 shares of AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) as of the end of the third quarter, trimming the position by 226 shares during the period. Navellier’s bullishness may be somewhat shaken now, as the stock has lost 21% year-to-date, despite surging by 65% in the first half of the year. The company managed to significantly beat earnings estimates for several quarters until the second trimester of 2015, when it missed the estimates by $0.01, reporting EPS of $1.12. We can assume that the sell-off of AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG)’s stock in the third quarter was more caused by the overall market fears rather than actual concerns, since the company is one of the rare profitable biotechs and analysts have set a price target of over $109 on the stock, which is more than double what AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG)’s currently trades at.

In Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP), Navellier cut his position by 62% to 25,600 shares during the third quarter. Meanwhile, Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)’s shares have advanced by 21% year-to-date, although excluding the decline from the last couple of months, the appreciation was much higher. Nevertheless, Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)’s stock is relatively cheap, trading at around 29-times earnings, significantly below the industry average.

BioSpecifics Technologies Corp. (NASDAQ:BSTC) is the fifth biotech stock in Navellier’s equity portfolio, the fund disclosing ownership of 14,020 shares as of September 30, up by 45% on the quarter. The stock has advanced by 37% since the beginning of the year, after it embarked on an uptrend in May following the release of BioSpecifics Technologies Corp. (NASDAQ:BSTC)’s financial results, which showed a significant jump in results compares to the prior year quarter.

Disclosure: None