This Hedge Fund Was a Beast Last Quarter

We track over 400 funds and investors, and have calculated the value-weighted returns for all funds in the 1500 largest stocks, while compiling a list of the top performing funds for the first three quarters of 2012. The returns are based on the fund’s 13F long positions only, as we do not have access to their short positions.

Palo Alto has done it again, finishing in the top five among top performing hedge funds for the second quarter in a row. After returning 26.2% for 2Q, the firm posted a 23.2% return for 3Q. Palo Alto’s performance was number one for 2Q, and fifth for 3Q. Palo kept its holdings relatively stable for 3Q, with the exception of making Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) its top holding by increasing its 1Q position 180%. Palo Alto was founded by William Leland Edwards in 1989 and invests in small cap stocks with market caps of less than $3 billion.

Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX)

Palo Alto’s top investment according to its 2Q 13F was Onyx Pharmaceuticals. Onyx is a biopharma company that was up 25% during 3Q after the FDA gave accelerated approval to one of its drugs. As mentioned, the Palo Alto upped its 1Q stake 180% and Onyx now makes up over 17% of the firm’s 13F portfolio. The company’s recent drug approval is not suppose to contribute greatly to sales for a few years, even so, the company is expected to generate $330 million in revenue in 2012 and $550 million in 2013. Palo Alto was the top fund shareholder in Onyx, with D.E. Shaw being number two. Worth noting was that a number of insiders have been selling of late in the range of $85-$91.

Palo Alto was has been able to outpace most of its peers so far this year with big bets in biopharma. Rounding out Palo Alto’s top five picks according to its 2Q 13F are Cyberonics, Inc. (NASDAQ:CYBX), Viropharma Inc (NASDAQ:VPHM), Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL) and Medicis Pharmaceutical Corp (NYSE:MRX). Palo Alto has a relatively concentrated portfolio with over 40% of the firm’s 13F invested in these five holdings.

Cyberonics is a medical device company, the only non-biopharma company of Palo Alto’s top five picks. The company was up 18% in 3Q after reiterating its 2013 guidance. Cyberonics now expects 2013 EPS to be in the range of $1.49 to $1.59, compared to previous estimates of $1.56. Last quarter results for Cyberonics came in at $0.38 compared to $0.27 for the same quarter a year ago. Following the announcement, Canaccord upgraded the company to a “buy” and raised its price target from $34 to $56. Cyberonics had not only Palo Alto, the top fund owner by shares, but also had Jim Simons as owning the second largest amount of shares, which was a 19% increase from his 1Q position.

Viropharma was up 25% during the third quarter and is another biophrama company. The company’s pop was thanks to FDA approval for industrial scale manufacturing changes of one of its drugs. The company, unlike other peers, has a calculable  P/E that comes in around 30x. As well, the company is expected to grow 2013 EPS by 9% from 2012. Palo Alto was the second largest share owner among the funds we track at the end of June, with 3.5 million shares. Baker Bros. Advisors was on the top of the proverbial money pile, owning 11.3 million shares.

Auxilium Pharmaceuticals was actually down 8% for 3Q, but only represents 7% of Palo Alto’s 13F. Auxilium got an initial boost at the end of 2Q on approval of its primary drug in Canada. Since then, the stock’s hype has cooled off and it has been in steady decline. However, the company recently upped its 2013 guidance and saw a slew of upgrades from investment firms WallachBeth, UBS and Zack’s, all upgrading the company on positive outlook for sales of its recent drug approval in Canada, and the potential for FDA approval south of the International Boundary. Baker Bros. again topped Palo Alto with the most shares owned at the end of June. Baker owned 6.3 million shares, which was 4% of the firm’s 2Q 13F portfolio. Other notable biopharma enthusiast Jim Simons increased his 1Q position by over 50% in 2Q.

Medicis Pharmaceutical was Palo Alto’s fifth largest holding, and was up almost 30% last quarter. Driving Medicis higher was a buyout offer by Valeant Pharmaceuticals. The buyout was for $44 per share and valued Medicis at $2.6 billion. Even with the premium on its shares, the company still trades in line with its peers on a valuation basis at around 30x earnings. Palo Alto was not the top fund owner by shares for Medicis at the end of June; it was Iridian Asset Management with over 2 million shares. Other top fund managers increasing their modest 1Q positions by more than 35% were D.E. Shaw and Ken Griffin.