Phill Gross and Robert Atchinson founded Adage Capital Management in 2001 after spending 18 and 10 years respectively at the Harvard Management Company (HMC). From its start with $1.8 billion in assets under management (AUM) provided by HMC, which also owns a minority stake in the fund, Adage Capital today boasts a public equity portfolio of over $41 billion as highlighted by the fund’s latest 13F filing for the period of March 31. The filing also revealed that Adage’s top ten holdings currently constitute 13.87% of the fund’s public equity portfolio and that it initiated a stake in 119 new stocks in the first quarter. In terms of sectors, Adage is most bullish on healthcare and technology stocks, which accounted for 20% and 15% of the value of Adage’s current public equity portfolio respectively. In this article we are going to focus on Adage’s top small-cap picks: Puma Biotechnology Inc (NYSE:PBYI), Reliance Steel & Aluminum (NYSE:RS), and Burlington Stores Inc (NYSE:BURL).
One may ask why specifically the top small-cap stocks? Before we answer that question, one first needs to understand that hedge funds like Adage Capital Management invest in hundreds of companies, but mostly in large-caps and blue-chip companies that constitute the bulk of such fund’s portfolios. However, our research has shown that in the period between 1999 and 2012 the top small-cap picks of hedge funds outperformed the broader market by nearly one percentage point per month, whereas the top overall picks (mostly large-caps) underperformed by seven basis points per month during the same period. Why pay high fees to own a glut of low-performing stocks when you can invest on your own in hedge funds’ best stock picks? Since its launch in August 2012, Insider Monkey’s small-cap strategy has outperformed the S&P 500 every year, returning over 142% since then, nearly 2.5 times greater than the S&P 500’s returns.
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Puma Biotechnology Inc (NYSE:PBYI) is not only Adage’s top small-cap pick, but also the fund’s top pick overall. During the quarter ending March 31, Adage left its stake in Puma Biotechnology Inc (NYSE:PBYI) unchanged at over 5.86 million shares valued at $1.34 billion. Shares of the development-stage biopharmaceutical company are up by more than 130% over the last year and nearly 1,000% over the last five years. For the first quarter of this year, the company reported an adjusted EPS loss of $1.02, compared to the adjusted EPS loss of $0.50 it reported for the same quarter last year. On average, analysts have an ‘Overweight’ rating on the stock with a price target of $274.50, representing phenomenal upside potential of over 100%. Among the hedge funds we track, Samuel Isaly’s Orbimed Advisors and Donald Chiboucis’ Columbus Circle Investors are bullish on Puma Biotechnology Inc (NYSE:PBYI), having increased their stakes by 48% and 2% respectively in the first quarter.
Adage Capital increased its stake by 10% in Reliance Steel & Aluminum (NYSE:RS) to over 3.3 million shares valued at $202 million in the quarter ending March 31. After suffering continuous decline in 2014, shares of the metal processing company have remained mostly flat in 2015, up around 3.5%. On June 8, Metals USA, a subsidiary of Reliance Steel & Aluminum (NYSE:RS) was awarded a $120 million contract by the Pentagon. For the quarter ending March 31, the company reported EPS of $1.30 on revenue of $2.61 billion, compared to EPS of $1.18 on revenue of 2.58 billion for the same period last year. The average recommendation of analysts covering the stock is ‘Overweight’, with an average price target of $67.70, upside potential of about 5%. Apart from Adage, Chuck Royce’s Royce & Associates is also a major shareholder in Reliance Steel & Aluminum (NYSE:RS), holding slightly over 4.0 million shares in the company as of March 31.
Although Adage reduced its exposure in Burlington Stores Inc (NYSE:BURL) by 39% to 3.17 million shares valued at $188 million in the first quarter, the company still remains the third most valuable small-cap position of the fund. Shares of Burlington Stores Inc (NYSE:BURL) have been on a constant uptrend since its IPO in October 2013 and in March 2015 made their all-time high of $61.94, hence Adage reducing its exposure could be seen mostly as a profit booking exercise. Out of 12 analysts who cover the stock, ten of them have a ‘Buy’ rating on it and the average price target of analysts is $62.25, upside potential of over 25%. Burlington Stores Inc (NYSE:BURL) revised its fiscal year 2016 outlook on March 9 and now expects EPS for the year to come in the range of $2.15-$2.25, slightly lower than analysts’ estimate of $2.28. Similar to Adage cutting back its exposure, Ken Griffin’s Citadel Investment Group also reduced its stake in the company by 33% to 2.75 million shares in the first quarter.
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