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This Small-Cap Stock With 100% Upside Potential Tops Hedge Fund Adage Capital’s Portfolio

Phill Gross and Robert Atchinson founded Adage Capital Management in 2001 after spending 18 and 10 years respectively at the Harvard Management Company (HMC). From its start with $1.8 billion in assets under management (AUM) provided by HMC, which also owns a minority stake in the fund, Adage Capital today boasts a public equity portfolio of over $41 billion as highlighted by the fund’s latest 13F filing for the period of March 31. The filing also revealed that Adage’s top ten holdings currently constitute 13.87% of the fund’s public equity portfolio and that it initiated a stake in 119 new stocks in the first quarter. In terms of sectors, Adage is most bullish on healthcare and technology stocks, which accounted for 20% and 15% of the value of Adage’s current public equity portfolio respectively. In this article we are going to focus on Adage’s top small-cap picks: Puma Biotechnology Inc (NYSE:PBYI), Reliance Steel & Aluminum (NYSE:RS), and Burlington Stores Inc (NYSE:BURL).

Phill Gross

One may ask why specifically the top small-cap stocks? Before we answer that question, one first needs to understand that hedge funds like Adage Capital Management invest in hundreds of companies, but mostly in large-caps and blue-chip companies that constitute the bulk of such fund’s portfolios. However, our research has shown that in the period between 1999 and 2012 the top small-cap picks of hedge funds outperformed the broader market by nearly one percentage point per month, whereas the top overall picks (mostly large-caps) underperformed by seven basis points per month during the same period. Why pay high fees to own a glut of low-performing stocks when you can invest on your own in hedge funds’ best stock picks? Since its launch in August 2012, Insider Monkey’s small-cap strategy has outperformed the S&P 500 every year, returning over 142% since then, nearly 2.5 times greater than the S&P 500’s returns.

Phill Gross And Robert Atchinson
Adage Capital Management

Puma Biotechnology Inc (NYSE:PBYI) is not only Adage’s top small-cap pick, but also the fund’s top pick overall. During the quarter ending March 31, Adage left its stake in Puma Biotechnology Inc (NYSE:PBYI) unchanged at over 5.86 million shares valued at $1.34 billion. Shares of the development-stage biopharmaceutical company are up by more than 130% over the last year and nearly 1,000% over the last five years. For the first quarter of this year, the company reported an adjusted EPS loss of $1.02, compared to the adjusted EPS loss of $0.50 it reported for the same quarter last year. On average, analysts have an ‘Overweight’ rating on the stock with a price target of $274.50, representing phenomenal upside potential of over 100%. Among the hedge funds we track, Samuel Isaly’s Orbimed Advisors and Donald Chiboucis’ Columbus Circle Investors are bullish on Puma Biotechnology Inc (NYSE:PBYI), having increased their stakes by 48% and 2% respectively in the first quarter.