With the business of analyzing and compiling the data of our 737 tracked hedge funds’ latest 13F filings behind us, we’re ready to start sharing some of the findings from all that number crunching, with a series of reports that deliver insight on the stocks hedgies love in different sectors, and using different criteria. This is important, because contrary to the prevailing perception right now, hedge fund managers do know how to pick stocks, especially when it comes to small-cap stocks; they’re simply hampered as investment tools in and of themselves for a number of reasons. These include fees of 20% in most cases, to as much as 40% in others, that seriously cut into your potential returns; and an overabundance of capital which pushes them to invest in lower return large-cap stocks to use it all.
These are some of the factors that have contributed to hedge funds underperforming the market every year since 2008, including last year, and in some cases, underperforming it badly. On the other hand, by simply avoiding the funds and their overhang, and playing only their top 30 picks, investors could actually outperform the market by 2 percentage points annually. It gets even better when you limit the data to their top small-cap stocks only, with returns that outperform the market by double digits! That’s because unlike with large-cap stocks that are well-known and over-analyzed, many small-cap stocks are unheralded, and the average investor has little means of compiling meaningful data on the company’s operations or prospects. Hedge funds, with their teams of analysts and industry experts are well-equipped to root out those companies before they start making a name for themselves; i.e: before you hear about them. That’s why the top 15 small-cap picks of our hedgies were able to outperform the market by a whopping 18% annually.
This is most certainly true of the healthcare sector, where it seems there are dozens of new small-cap companies in early-phase testing popping up every week. Many of these never amount to anything, but the ones which do have a potentially viable treatment in the works within a lucrative area of the industry, can be gold mines waiting to happen for investors.
Of course, the consensus top picks in this list are comprised entirely of large-cap companies, for the reasons detailed above, though they still have plenty of value and potential to outperform the market. Now then, let’s take a look at the top ten healthcare stocks our funds love. If you’d like to compare lists afterwards, check out our top healthcare stocks listing from the previous filing period.
1. Actavis Plc (NYSE:ACT) remains the number one healthcare stock for the second straight quarter, with its deal to purchase Allergan being approved by shareholders of both companies during the fourth quarter. Fund ownership increased slightly during the quarter, to 17.8% from 17.4%, as shares continued to rise thanks to strong earnings from both companies. Andreas Halvorsen and Dan Loeb were two hedgies to increase their stakes in Actavis last quarter, while Roberto Mignone opened a new position.
2. Allergan, Inc. (NYSE:AGN) remains number two, and fund ownership also increased slightly last quarter, from 14.7% to 15.2%. Many hedgies were in this stock expecting a takeover from Valeant, which Bill Ackman was rebuffed in trying to execute. However Actavis saved the day with an even greater offer to Allergan shareholders. Though Ackman continued to push for a Valeant takeover on the grounds that their businesses were more synergistic and a merger with them would be better for shareholders long term, he ultimately couldn’t have been too disappointed with the outcome, which proved very lucrative for him. John Paulson, Matthew Halbower, Daniel S. Och, and Robert Pitts were other top Allergan shareholders, and all added to their positions last quarter.
