Should You Follow Hedge Funds Into These Healthcare Stocks?

Healthcare is a vast sector that nonetheless has huge growth prospects, with the U.S government and its citizens spending about $3 trillion annually in an attempt to stay healthy. The Health Care Select Sector SPDR ETF (XLV), which tracks the performance of the healthcare sector, rose by nearly 1.4% during April and has gained over 8% during the past year, despite mounting fears that drug prices could be reined in by government decree.

Thus, if one can invest in healthcare stocks wisely, they’re likely to enjoy impressive gains. But which healthcare stocks to buy remains the million-dollar question. At Insider Monkey, we believe in mimicking smart money managers and picking only their best stock positions. Hedge funds are like many other companies, they bundle products (in this case, stock picks) together and sell them to investors as a package deal. That means you get their 50th-best pick along with their best pick, and who wants to pay an arm and a leg in fees for that 50th-best pick?

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We’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 39.7% gains over the past 12 months and outperformed the 24.1% gain enjoyed by the S&P 500 ETFs. Our enhanced small-cap hedge fund strategy returned more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points over the last 4.5 years (see details here).

We cut through the fees to get right to hedge funds’ top picks, and in this article we’ll use that same approach to dissect healthcare stocks, revealing the five stocks which are the most popular among the 700+ successful hedge funds in our database. Check out the list beginning on the next page.

#5. Biogen Inc (NASDAQ:BIIB)

First on our list of the top healthcare stocks among hedge funds is Biogen Inc (NASDAQ:BIIB), which made headlines last month after its first quarter results beat estimates. One of Biogen’s strengths is its $125,000 drug Spinraza, the only approved medication to treat muscular atrophy. Spinraza’s sales in the first quarter reached a whopping $47 million thanks to that hefty price tag. Biogen spun-off its blood diseases division in the first quarter, which now trades on the Nasdaq as Bioverativ Inc (NASDAQ:BIVV).

As of the end of the fourth quarter of last year, 76 hedge funds in our database were long Biogen Inc (NASDAQ:BIIB). Principal Global Investors’ Columbus Circle Investors owns 149,379 shares of Biogen as of the end of March 2017.

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#4. Merck & Co., Inc. (NYSE:MRK)

At the end of the fourth quarter of 2016, 78 hedge funds in our database held long stakes in Merck & Co., Inc. (NYSE:MRK), compared to 84 funds a quarter earlier. The New Jersey-based pharmaceutical giant’s stock rallied on Tuesday after the company reported better-than-expected first quarter results and upped its guidance for the full year. Merck’s net income for the quarter increased to an impressive $1.55 billion from $1.13 billion on a year-over-year basis. Adjusted earnings per share came in at $0.88, above analysts’ forecast of $0.83. For the full year, Merck bumped up its EPS target to $3.88 from $3.72, and its revenue target to $40.3 billion from $38.6 billion. Merck & Co., Inc. (NYSE:MRK) dominates the lucrative cancer immunotherapy market and the company’s HCV drug Zepatier is now proving itself a strong competitor to Gilead’s blockbuster drug, Harvoni.

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#3. Pfizer Inc. (NYSE:PFE)

Pfizer Inc. (NYSE:PFE) posted its own first quarter results on Tuesday, according to which the company’s drug sales for the period remained flat amid declining growth and heightening competition. Sales of Pfizer’s rheumatoid arthritis drug Xeljanz, its prostate cancer treatment Xtandi, and its pneumonia vaccine Prevnar all fell short of the Street’s expectations. Goldman Sachs said in a report after the quarterly results were announced that the numbers cast doubt on Pfizer’s ability to grow in the absence of M&A activity. To that end, rumors suggest that Pfizer might be getting ready to launch a bid to acquire $92 billion Bristol-Myers Squibb Co (NYSE:BMY). Pfizer’s stock has gained about 6% in value over the last six months. A total of 82 hedge funds tracked by Insider Monkey were bullish on the company as of the end of 2016. Ken Fisher’s Fisher Asset Management owned about 32.76 million shares of Pfizer Inc. (NYSE:PFE) at the end of March.

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

Gilead Sciences, Inc. (NASDAQ:GILD) is another popular healthcare stock among the collection of top hedge funds tracked by Insider Monkey, as 84 of them were long the stock as of the end of 2016. The California-based biopharmaceutical company has a healthy dividend yield of 3.1%, one of the highest in the healthcare sector. Gilead Sciences, Inc. (NASDAQ:GILD) is famous for its breakthrough Hepatitis C treatment, though the stock sunk to new lows earlier this year after the company gave a bearish sales outlook. Gilead reported total revenue of $12.8 billion from its eight HIV treatments in 2016. It is in the process of concluding late-stage trials for Bictegravir in combination with F/TAF, and analysts think the drug could be a blockbuster, potentially reaching annual sales of over $5 billion.

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#1. Allergan plc Ordinary Shares (NYSE:AGN)

As of the end of the fourth quarter of 2016, 97 hedge funds in our database were long Allergan plc Ordinary Shares (NYSE:AGN), down from 115 funds a quarter earlier. Nonetheless, it remained the most popular healthcare stock among hedge funds, and has rewarded those bullish investors with gains of 23% over the past six months. Last month, the company said that has received market authorization from the FDA for its TrueTear Intranasal Tear Neurostimulator, the first and only FDA-approved device developed to temporarily increase tear production during neurostimulation. Citigroup analyst Liav Abraham recently said in a report that Allergan plc Ordinary Shares (NYSE:AGN)’s pipeline is “overlooked and undervalued” by Wall Street. The analyst has a ‘Buy’ rating on the stock.

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Disclosure: None