Five Cheap Healthcare Stocks With Hedge Fund Support

When it comes to the risk-reward ratio, there are very few sectors which can match up to healthcare. The healthcare universe boasts of several companies which on the back of a drug approval or a M&A deal swiftly completed the journey from being a small-cap stock to a large-cap stock. However, being a highly advanced field investors find it extremely difficult to find the right healthcare stocks for their portfolios, especially those stocks which have the potential to become multi-bagger in the future. To make their stock selection easier, we at Insider Monkey consistently analyze the portfolios of over 800 hedge funds that we cover in order to identify those hidden gems in the healthcare sector which are currently trading cheap, but have the backing of several large investors. Taking that into account, in this post we are going to focus on the five healthcare stocks that are currently trading under $10 per share and which ranked as the most popular among hedge funds covered by us going into 2016.

We track prominent investors and hedge funds 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 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Array Biopharma Inc (NASDAQ:ARRY)

 – Investors with Long Positions (as of December 31): 23

 – Aggregate Value of Investors’ Holdings (as of December 31): $265 million

While the ownership of Array Biopharma Inc (NASDAQ:ARRY) among investors covered by us inched up by one during the fourth quarter, the aggregate value of their holdings in the company saw a marginal decline of $1.17 million. Array Biopharma Inc (NASDAQ:ARRY) has lost more than half of its market capitalization in the past six months and is currently trading down by over 36% year-to-date. For its fiscal 2016 second quarter, the company reported a per share loss of $0.17 on revenue of $35.40 million versus analysts’ expectation of a per share loss of $0.06 on revenue of $32.70 million. A day after its earnings release, on February 3, analysts at Stifel Nicolaus reiterated their ‘Buy’ rating on the stock, but lowered their price target to $7 from $8. Among the hedge funds that reduced their stakes in the company during the fourth quarter was James E. Flynn‘s Deerfield Management. The fund cut its holding by 11% to 8.73 million shares during that period.

#4 Synergy Pharmaceuticals Inc (NASDAQ:SGYP)

 – Investors with Long Positions (as of December 31): 24

 – Aggregate Value of Investors’ Holdings (as of December 31): $143.8 million

Amid a 7% increase in Synergy Pharmaceuticals Inc (NASDAQ:SGYP)’s stock during the fourth quarter, the number of investors covered by us with long positions in the stock came down by seven. However, the aggregate value of their holdings in the company increased by $9.2 million during the same time. On March 18, shares of the company plunged after it had disclosed in an 8-K filing that it has exchanged its convertible debt (7.50% Convertible Senior Notes due 2019) at a significant discount (an implied share price of $2.47) to its current stock price. Including these losses, shares of Synergy Pharmaceuticals Inc (NASDAQ:SGYP) have lost almost half of their value so far this year. On March 16, analysts at Citigroup reiterated their ‘Neutral’ rating on the stock and cut their price target to $4 from $7, which represents a potential upside of around 38% from the stock’s current trading price. With ownership of 9 million shares of the company, billionaire John Paulson‘s Paulson & Co remained the largest shareholder of Synergy Pharmaceuticals among the funds tracked by us at the end of December.

#3 Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN)

 – Investors with Long Positions (as of December 31): 24

 – Aggregate Value of Investors’ Holdings (as of December 31): $477.84 million

Moving on, Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN)’s stock rose over 56% in the fourth quarter, but has given up most of those gains this year and now trades down 33.58% year-to-date. Despite such a large surge in the company’s stock during the fourth quarter only the aggregate value of the holdings in it of investors covered by us saw a 77.2% rise during the same period, the number of bullish investors among the funds we track remained constant at 24. The majority of analysts who cover (NASDAQ:ACHN)’s stock currently are quite optimistic about its future due to the company’s drug pipeline, which they believe will help it in increasing its market share going forward. On February 26, analysts at Robert W. Baird upgraded the stock to ‘Outperform’ from ‘Neutral’ while maintaining their price target of $10. Billionaire Israel Englander‘s Millennium Management became bullish on Achillion Pharmaceuticals during the fourth quarter and raised its holding in the company by 1,369% to 4.88 million shares.

#2 Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA)

 – Investors with Long Positions (as of December 31): 29

 – Aggregate Value of Investors’ Holdings (as of December 31): $246 million

Shares of Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) have rallied by nearly 25% since the company reported its fourth-quarter results on February 23. In that process, they have recouped all the losses they suffered earlier in the year and now trade flat for 2016. During the fourth quarter, the number of funds from our database long Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA)’s stock remained unchaged, but the aggregate value of their holdings inched up by 5.7%. For the fourth quarter per share loss of company at $0.32 came in-line with analysts’ expectations, but the revenue of $36.50 million was considerably below the consensus estimate of $44.79 million. On March 9, analysts at JMP Securities reiterated their ‘Market Perform’ rating on the stock, but lowered their price target on it to $9 from $11. Billionaire David E. Shaw‘s firm,  D. E. Shaw, increased its stake in Ariad Pharmaceuticals, Inc. by 653% to 1.17 million shares during the fourth quarter.

#5 Rite Aid Corporation (NYSE:RAD)

– Investors with Long Positions (as of December 31): 18

– Aggregate Value of Investors’ Holdings (as of December 31): $182.4 million

Rite Aid Corporation (NYSE:RAD)’s stock saw a considerable boost after Walgreens Boots Alliance announced in October that it has agreed to acquire the company  for $9.00 per share in cash in October. However, that announcement and that surge didn’t entice smart money enough to buy Rite Aid Corporation (NYSE:RAD)’s stock. During the fourth quarter, the ownership of the company among funds covered by us increased only by one and the aggregate value of their holdings in it rose only 21.2%. On March 3, the company announced that its same store sales  declined by 0.8% year-over-year in February. The 11 prominent analysts and research houses that cover the stock currently have an average rating of ‘Overweight’ and an average price target of $9 on it. Nick Niell‘s Arrowgrass Capital Partners initiated a large stake in Rite Aid Corporation during the fourth quarter by purchasing over 30 million shares of the company and became its largest shareholder among the funds tracked by us, at the end of December.

Disclosure: None