Penny stocks are a risky investment, as many such companies have a product or products that are a long way from generating revenues (if they’re ever able to at all). However, if an investor can pick out the right candidate among these penny stocks, the future returns can be substantial. In order to increase these odds, we have decided to share five penny stocks from the healthcare sector that are the most popular among the hedge funds from our database, which implies that these money managers have rigorously researched these companies before assigning them a place in their equity portfolios. You can be sure that when these elite investors are collectively taking stakes in such obscure stocks, there is something noteworthy happening with those companies.
We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by over 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).
5. InspireMD Inc (NYSEMKT:NSPR)
Investors with Long Positions (as of June 30): 7
Aggregate Value of Investors’ Holdings (as of June 30): $3.02 Million
Even though the stock price of the $14.79 million medical device company has fallen by more than 76% so far this year, the hedge fund interest in the company has largely remained the same, with a reduction of one fund from the total number of investors during the second quarter, and a $1.67 million decrease in their total investments, mostly on the back of stock depreciation during the period. The hedge fund concentration in the company at the end of June amounted to 13.8% of InspireMD’s total shares. The biggest dip for InspireMD Inc (NYSEMKT:NSPR)’s stock came in early March when the company announced a public offering for $13.5 million. Steven Boyd‘s Armistice Capital is the largest stockholder of InspireMD Inc (NYSEMKT:NSPR), holding about 6.56 million shares valued at $1.84 million, and representing 8.41% of the company’s outstanding shares.