Hedge Funds’ Favorite Recently-Public Companies amid Atrophied IPO Market

There was not a single initial public offering in January and the U.S. IPO market has almost evaporated in 2016. However, this week will most likely be the busiest for the nation’s IPO market in 2016, as six companies are set to go public over the course of the week. The intrinsic value of a company is fully dependent upon its current and future cash flow streams generated over its lifetime. As a result, the worries over a slowing global economy create uncertainties about a company’s future cash flows, which makes it particularly hard to conduct an appropriate valuation analysis. So the extreme uncertainty and volatility in financial markets add to companies’ reluctance to conduct IPOs and hinder investors’ willingness to invest in scheduled IPOs. Moreover, there are only a few investors who would be willing to invest in an IPO if they were to consider the performance of IPO companies in 2015. Nonetheless, Insider Monkey decided to lay out a list of five most popular IPOs conducted in the first quarter of 2016 based on hedge fund sentiment, as well as discuss the performance of those freshly-listed companies since going public.

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).

#5. Nuvectra Corp (NASDAQ:NVTR)

– Investors with long positions as of March 31: 15

– Aggregate value of investors’ holdings as of March 31: $7.62 Million

There were 15 hedge funds tracked by Insider Monkey that had equity investments in Nuvectra Corp (NASDAQ:NVTR) at the end of the March quarter, which were aggregately valued at $7.62 million on March 31. In mid-March, medical devices manufacturer Greatbatch Inc. (NYSE:GB) completed the spin-off of its wholly-owned subsidiary QiG Group LLC and its subsidiaries Algostim LLC, PelviStim LLC and NeuroNexus Technologies into a publicly-traded company called Nuvectra Corporation. The newly spun-off company, which operates as a neurostimulation medical device company, recorded total revenue of $2.1 million for the first quarter of 2016 versus $1.2 million in the same quarter of 2015. Going back to the aforementioned separation, Greatbatch shareholders received one share of Nuvectra for every three shares of Greatbatch. Shares of Nuvectra are up 10% since mid-March. Dov Gertzulin’s DG Capital Management LLC owns nearly 271,000 shares of Nuvectra Corp (NASDAQ:NVTR) as of March 31.

#4. Beigene Ltd (ADR) (NASDAQ:BGNE)

– Investors with long positions as of March 31: 15

– Aggregate value of investors’ holdings as of March 31: $115.21 Million

A total number 15 asset managers tracked by Insider Monkey were invested in Beigene Ltd (ADR) (NASDAQ:BGNE) at the end of the first quarter of 2016, with their overall equity investments being valued at $115.21 million. In early February, the cancer-focused clinical-stage biopharmaceutical company completed its initial public offering on the NASDAQ stock exchange by selling to the public 6.60 million American Depositary Shares (ADSs) at a price of $24.00 per ADS. Moreover, the underwriters exercised their options to purchase an additional 990,000 ADSs. The oncology drug maker has seen its ADSs lose 6% of their value in the past three months, but they continue to change hands above the IPO price of $24. Beigene’s future growth potential strongly relies on its proprietary cancer biology platform that combines a unique access to internal patient-derived biopsies with strong oncology biology. Baker Bros. Advisors LP, founded by Julian and Felix Baker, has 1.92 million ADSs of Beigene Ltd (ADR) (NASDAQ:BGNE) among its pool of holdings as of the end of the first quarter.

#3. Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ)

– Investors with long positions as of March 31: 17

– Aggregate value of investors’ holdings as of March 31: $54.92 Million

Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ) resided the equity portfolios of 17 hedge funds tracked by our team at the end of the March quarter. Those 17 smart money investors had $54.92 million worth of equity investments in the specialty pharmaceutical company at the end of the quarter and accumulated 24% of its total number of outstanding shares. Aralez Pharmaceuticals was formed as a result of the business combination between specialty pharmaceutical company POZEN Inc. and industry peer Tribute Pharmaceuticals Canada Inc., which closed in early February. Under the terms of the agreement between the aforementioned companies, each share of POZEN was converted into the right to receive one Aralez share and each share of Tribute was exchanged for 0.1455 Aralez shares. The newly-formed company operates as a global specialty pharmaceutical company with operations in Canada, Ireland and the United States. Shares of Aralez are down 29% since early February. Kevin Kotler’s Broadfin Capital reported owning 3.80 million shares of Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ) in its latest 13F filing.

#2. Silver Run Acquisition Corp (NASDAQ:SRAQU)

– Investors with long positions as of March 31: 25

– Aggregate value of investors’ holdings as of March 31: $315.97 Million

There were 25 asset managers from our system with long positions in Silver Run Acquisition Corp (NASDAQ:SRAQU) on March 31. The aggregate value of those positions totaled $315.97 million at the end of March. The energy-focused blank check company completed its initial public offering in late February by offering to the public 50.00 million units, including 5.00 million greenshoe options. The company raised roughly $500 million in the initial public offering, which will be used to fund the acquisition of energy companies. Silver Run Acquisition is currently involved in the process of locating suitable targets within the recovering energy industry, where the valuations of most energy companies have been battered as a global oil supply glut weighted significantly on crude oil prices and those companies’ prospects. The freshly-completed IPO of this blank check company may suggest that investors believe valuations in the energy sector have reached a bottom. Seth Klarman’s Baupost Group LLC was the owner of 3.75 million units of Silver Run Acquisition Corp (NASDAQ:SRAQU) at the end of March.

#1. GCP Applied Technologies Inc. (NYSE:GCP)

– Investors with long positions as of March 31: 27

– Aggregate value of investors’ holdings as of March 31: $652.70 Million

A total of 27 hedge funds vehicles included in our extensive database were invested in GCP Applied Technologies Inc. (NYSE:GCP) at the end of the January-to-March period, with their equity investments being valued at $652.70 million on March 31. The 27 money managers stockpiled approximately 46% of the company’s outstanding common stock. In early February, W. R. Grace & Co (NYSE:GRA) completed the separation of the business that makes catalysts used in oil and chemical refining from the business that produces chemicals used in cement and concrete. Precisely, W. R. Grace spun-off its Grace Construction Products operating segment and the packaging technologies business of its Grace Materials Technologies operating segment into a new publicly-traded company called GCP Applied Technologies. After the recently-completed separation, the reshuffled Grace would have roughly $1.76 billion in sales and GCP Applied would generate $1.48 billion in sales. Under the terms of the separation, W. R. Grace shareholders were given one share of GCP for each share of Grace. Adage Capital Management, founded by Phillip Gross and Robert Atchinson, owns 3.32 million shares of GCP Applied Technologies Inc. (NYSE:GCP) as of the end of the March quarter.

Disclosure: None