Hedge Funds’ Favorite Medical Care Stocks

During times of economic uncertainty or extreme volatility in the markets, medical care stocks usually perform much better than their counterparts in other industries. The reason behind that outperformance is simple – economic conditions and macro factors don’t weigh heavily on the financials of medical care companies. Regardless of which phase in economic life cycle we find ourselves in, unfortunately, there will always be people spending on medical care to recover from an injury or illness. This spending ensures that medical care companies are able to generate stable cash flows year after year. Since most investors – both big and small – love companies with stable cash flows, medical care stocks as a group never go out of fashion. However, some stocks within that space do end up getting more popular than others as times change. Taking that into account, we at Insider Monkey come up with a list of the most popular medical care stocks among the over 800 hedge funds covered by us. Read further, to know which were the five medical care stocks that topped our list this time around.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

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#5 VCA Inc (NASDAQ:WOOF)

 – Investors with long positions (as of March 31): 33

– Aggregate value of investors’ holdings (as of March 31): $697.45 million

Let’s start with VCA Inc (NASDAQ:WOOF), which saw a marginal decline in its popularity among hedge funds during the first quarter with the number of funds covered by us long the stock inching down by one and the aggregate value of their holdings in it dropping by 7.5%. Funds that upped their stake in the company during that period included billionaire David E. Shaw‘s firm, D.E. Shaw, which increased its holding in the company by 10% to 1.36 million shares. Shares of the animal healthcare company have been on a strong uptrend since the beginning of 2013. Though they  corrected a bit at the start of 2016, they have again resumed their uptrend and are currently trading up by around 18% year-to-date. Some analysts who cover the stock feel that it has become expensive and are advising investors to wait for a pullback in the stock before buying it. On May 3, the company completed its acquisition of 80% ownership stake in Companion Animal Practices, which it had announced this year in February.

#4 Tenet Healthcare Corp (NYSE:THC)

 – Investors with long positions (as of March 31): 34

– Aggregate value of investors’ holdings (as of March 31): $887.08 million

The almost 50% decline in Tenet Healthcare Corp (NYSE:THC)’s stock during the second-half of 2015 spooked hedge funds. Its effect was felt during the first quarter of this year as well, when the ownership of the company among funds covered by us declined by three and the aggregate value of their holdings in it shrank by $110.5 million. So far in 2016, Tenet Healthcare Corp (NYSE:THC)’s stock has lost over 4% of its value, which to a large extent can be attributed to the decline it saw recently after a federal judge deemed the Obama administration spending money to reimburse health insurers as unconstitutional. The stock is currently trading at forward P/E of 11.95, which analysts believe is a reasonable valuation considering the headwinds the company faces. Larry Robbins‘ Glenview Capital didn’t make any changes to its stake of 17.89 million shares of Tenet Healthcare Corp during the first quarter and continued to remain the largest shareholder of the company among funds covered by us at the end of that period.

#3 Universal Health Services, Inc. (NYSE:UHS)

 – Investors with long positions (as of March 31): 38

– Aggregate value of investors’ holdings (as of March 31): $1.09 billion

Moving on, hedge funds covered by us long Universal Health Services, Inc. (NYSE:UHS) increased by two and the aggregate value of their holdings in the company jumped by $148 million during the first quarter. Billionaire Cliff Asness‘ AQR Capital Management was among the funds that increased its stake in the company during that period, by 19% to 1.04 million shares. Aided by the strong quarterly numbers the company reported recently, Universal Health Services, Inc. (NYSE:UHS)’s stock is currently trading with gains of 12.8% in 2016. While analysts had expected the company to report $1.87 on revenue of $2.41 billion, Universal Health Services declared EPS of $1.98 on revenue of $2.62 billion for the first quarter. Following the earnings release, on May 28, analysts at Mizuho reiterated their ‘Buy’ rating on the stock while upping their price target on it to $150 from $140.

#2 HCA Holdings Inc (NYSE:HCA)

– Investors with long positions (as of March 31): 68

– Aggregate value of investors’ holdings (as of March 31): $4.29 billion

In terms of the number of the number of hedge funds covered by us with ownership in a company, HCA Holdings Inc (NYSE:HCA)  was the top medical care stock at the end of first quarter. During that period, the ownership of the company among funds covered by us inched up by one and the aggregate value of their holdings in the company jumped up by $471 million. Shares of the largest hospital chain operator (by revenue) in the country have appreciated by around 17% so far this year, but are still trading down 18.16% from their lifetime high of $95.49, which they made last year. On May 3, HCA Holdings Inc (NYSE:HCA) reported its fiscal 2016 first quarter earnings, declaring EPS of $1.71 on revenue of $10.26 billion versus analysts’ projection of EPS of $1.49 on revenue of $10.24 billion. Richard Perry‘s Perry Capital reduced its stake in HCA Holdings Inc by 10% to 2.77 million shares during the first quarter.

#1 DaVita HealthCare Partners Inc (NYSE:DVA)

– Investors with long positions (as of March 31): 37

– Aggregate value of investors’ holdings (as of March 31): $4.3 billion

Though the ownership of DaVita HealthCare Partners Inc (NYSE:DVA) among funds covered by us came down by one during the first quarter, the aggregate value of their holdings in the company went up by $270 million during the same period. The 37 funds covered by us that reported owning a stake in the company, accounted for 28.40% of its float the end of first quarter. However, a major chunk of that float was owned by only one hedge fund – Warren Buffett‘s Berkshire Hathaway. At the end of first quarter, Berkshire Hathaway continued to own 38.56 million or nearly 10% of all outstanding shares of DaVita HealthCare Partners Inc (NYSE:DVA). Shares of the kidney care services provider are currently trading up over 9% year-to-date, but most analysts feel that it will be hard for it to appreciate further. The stock currently sports an average rating of ‘Hold’ and an average price target of $78.10 from the 14 leading analysts on the Street who track it.

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