Hedge Funds Love These Biotech Stocks

Biotech has undoubtedly been one of the most cherished industries, among hedge funds over the last few years and it’s not hard to understand why. The rapid pace of M&A in the sector along with the several blockbuster drug approvals and launches has helped several funds in making outsized gains, something that only a few other industry sectors can match up to. However, after seeing a perpetual rise during several consecutive quarters most biotech stocks embarked on a major correction in the second-half of this year. The NASDAQ Biotechnology (INDEXNASDAQ:NBI) index, although still trades up 4.54% year-to-date, is down 20% from its peak of 4194.87 reached in July. Nevertheless, the biotech industry contains hundreds of stocks, of which only a select few can reward investors with substantial gains and one of the ways to find out which stocks are these, we have compiled a list of five companies that are the most popular among the funds we track.

We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. S&P 500’s 49% gain) over the last 37 months (see the details here).

#5 Medtronic PLC (NYSE:MDT)

– Hedge Funds with Long Positions (as of September 30): 58

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $2 billion

Ireland-based medical technology company Medtronic PLC (NYSE:MDT) is among the few biotech stocks that are currently trading in the green for the year. The company posted solid results for the second quarter of its fiscal 2016, boosted by strong sales of newly released products. Moreover, Medtronic PLC (NYSE:MDT) has announced plans to buy back shares and retire some of its debt, using around $9.8 billion of overseas cash that has recently been repatriated. Amid a 9.7% drop of the stock in the third quarter, the number of funds bullish on the company declined by five, while the aggregate value of their holdings fell by $495 million. Having increased its stake in Medtronic PLC by 25% to 5 million shares during the third quarter, Doug Silverman and Alexander Klabin‘s Senator Investment Group continued to remain the company’s largest shareholder among the funds we track at the end of September.

#4 Biogen Inc (NASDAQ:BIIB)

– Hedge Funds with Long Positions (as of September 30): 60

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $3.78 billion

Biogen Inc (NASDAQ:BIIB)’s stock took a beating in the third quarter after the company reported its second quarter numbers on July 24 and also announced that it would be slashing 11% of its workforce. A major highlight of Biogen Inc (NASDAQ:BIIB)’s last quarterly results was that its cash balance rose more than threefold to $4.1 billion during the July-September period, which the company might use to pursue a potential acquisition. Despite the over 27% decline the company suffered during the third quarter, its ownership among funds declined by only 3 the aggregate value of investors’ holdings in it fell by only 11.7%. On December 1 analysts at Raymond James reiterated their ‘Buy’ rating and $104 price target on the stock. Robert Pitts‘ Steadfast Capital Management initiated a stake in Biogen Inc (NASDAQ:BIIB) during the third quarter by acquiring 952,862 shares of the company.

#3 Illumina, Inc. (NASDAQ:ILMN)

– Hedge Funds with Long Positions (as of September 30): 62

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $2.25 billion

Genetics analysis company Illumina, Inc. (NASDAQ:ILMN) is a unique stock in this list, considering the fact that the number of hedge funds long the company declined by only two, but the aggregate value of investors’ holdings in it dropped a whopping 42.7% during the third quarter. On December 14, Illumina, Inc. (NASDAQ:ILMN) announced that it has entered into an agreement with Beijing-based Novogene  to jointly develop advanced clinical applications in the fields of reproductive health and oncology. Analysts believe this deal will give a major boost to the company in solidifying its presence on the Chinese market. Stephen Mandel‘s Lone Pine Capital remained the company’s largest shareholder at the end of September even after decreasing its stake by 37% to 3.6 million shares during the quarter.

#2 Amgen, Inc. (NASDAQ:AMGN)

– Hedge Funds with Long Positions (as of September 30): 73

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $4.46 billion

Shares of Amgen, Inc. (NASDAQ:AMGN) have remained in a tight range this year, but its popularity among hedge funds is on a rise. While Amgen, Inc. (NASDAQ:AMGN)’s stock dropped 9% during the third quarter, the number of funds increased by five and the aggregate value of investors’ holdings in the company increased by $226 million. The company recently increased its quarterly dividend by 27% to $1 per share and also announced that it intends to purchase shares worth $2-$3 billion in 2016. Billionaire Israel Englander‘s Millennium Management increased its stake in Amgen, Inc. (NASDAQ:AMGN) during the third quarter to over 1.5 million shares.

#1 Gilead Sciences, Inc. (NASDAQ:GILD)

– Hedge Funds with Long Positions (as of September 30): 90

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $4.76 billion

Finally, biopharmaceutical behemoth Gilead Sciences, Inc. (NASDAQ:GILD) is not only the top stock in this list, but also counts as one of the most popular stocks among the funds we track. Though the number of funds bullish on Gilead Sciences, Inc. (NASDAQ:GILD) increased by six, the aggregate value of investors’ holding declined by 3.4% during the third quarter. Recently the company got embroiled in a controversy after the US Senate finance committee released a report in which it highlighted that Gilead Sciences has used unfair pricing practices for its Hepatitis-C drugs ‘Harvoni’ and ‘Sovaldi’. After boosting its stake by 586% during the second quarter, Billionaire David E. Shaw‘s firm, D.E. Shaw, again increased its stake in Gilead Sciences by 41% to 6.15 million shares during the third quarter.

Disclosure: None