Top Picks of Healthcare-focused Asset Manager Run by Former SAC Capital Traders

HealthCor Management L.P. was co-founded by Joseph Healey and Arthur Cohen, two former SAC Capital Advisors traders, in 2005. In fact, the founders of the New York-based long-short equity hedge fund were sued by Steve Cohen’s former SAC Capital, accusing the pair of breaching their employment contracts by leaving SAC to launch their own shop.

HealthCor performed quite strongly in the first several years of activity, as the fund returned 25% in 2006, 18% in 2007 and 4% in 2008. It should be noted that HealthCor made money in 2008, whereas the average hedge fund firm lost 19% during that year. Retail investors seeking to add a few healthcare-related stocks to their portfolios should definitely have a look at HealthCor’s portfolio. For that reason, Insider Monkey decided to lay out the five largest equity holdings in HealthCor Management’s portfolio at the end of the March quarter, as well as discuss the performance of those positions to date.

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. Mallinckrodt PLC (NYSE:MNK)

– Shares owned by HealthCor Management as of March 31: 1.73 Million

– Value of HealthCor Management’s holding as of March 31: $105.71 Million

HealthCor Management upped its position in Mallinckrodt PLC (NYSE:MNK) by nearly 1.48 million shares during the first three months of 2016, ending the March quarter with 1.73 million shares. The reshuffled position was worth $105.71 million at the end of March and made up roughly 6.0% of the fund’s entire portfolio. The maker of branded and generic specialty pharmaceutical and biopharmaceutical products has seen its market value plunge by 21% since the beginning of 2016, presumably because of intense scrutiny about price gouging around Canadian drug maker Valeant Pharmaceuticals Intl Inc. (NYSE:VRX). Mallinckrodt’s Acthar, a drug used for the treatment of seizures in infants that accounts for more than one-fourth of the company’s revenues, cost $1,650 a vial in 2007, but the price jumped to $23,000 a vial in 2012.  Short-seller Andrew Left of Citron Research said earlier this year that the Dublin-based pharmaceutical company is “robbing from the health care system”. John Paulson’s Paulson & Co owns 8.95 million shares of Mallinckrodt PLC (NYSE:MNK) as of the end of March.

#4. Laboratory Corp. of America Holdings (NYSE:LH)

– Shares owned by HealthCor Management as of March 31: 950,000

– Value of HealthCor Management’s holding as of March 31: $111.27 Million

The New York-based asset manager was also bullish on Laboratory Corp. of America Holdings (NYSE:LH) during the first quarter of 2016, as the firm increased its stake in LabCorp by 150,000 shares during the quarter to 950,000 shares. The upped stake was valued at $111.27 million on March 31 and accounted for 6.3% of the firm’s portfolio. The shares of the healthcare diagnostics company are up 4% thus far in 2016, fully recovering from the plunge experienced since early January through mid-February. In early June, analysts at Credit Suisse raised their price target on LabCorp to $143 from $135 and maintained their “Outperform” rating on the company, citing low synergy targets from the acquisition of Covance completed in early 2015 and “manageable” Medicare fee schedule changes. Investors have been previously worried about a possible decline in fees for laboratory services reimbursed by Medicare. Larry Robbins’ Glenview Capital was the owner of 5.46 million shares of Laboratory Corp. of America Holdings (NYSE:LH) at the end of the first quarter.

Let’s head to the next page of this article, where we will reveal the top three holdings in HealthCor’s portfolio at the end of March.

#3. DexCom Inc. (NASDAQ:DXCM)

– Shares owned by HealthCor Management as of March 31: 1.78 Million

– Value of HealthCor Management’s holding as of March 31: $120.54 Million

HealthCor Management L.P. added 1.03 million DexCom Inc. (NASDAQ:DXCM) shares to its existing position in the company, which comprised 1.78 million shares on March 31. The increased position was worth $120.54 million shares at the end of March, constituting 6.8% of the firm’s portfolio. The maker of continuous monitoring systems for people suffering with diabetes has seen its market value decline by 6% since the start of 2016. Earlier this week, DexCom announced plans to build a new manufacturing facility in Arizona in an attempt to grow its continuous glucose monitoring business. The facility’s initial manufacturing operations are anticipated to start in the second quarter of 2017. The company’s revenues for the first three months of 2016 increased to $116.2 million from $72.8 million, mainly due to higher sales of its disposable sensors that communicate with various devices such as the iPhone. Roberto Mignone’s Bridger Management had 834,203 shares of DexCom Inc. (NASDAQ:DXCM) among its holdings on March 31.

#2. Quest Diagnostics Inc. (NYSE:DGX)

– Shares owned by HealthCor Management as of March 31: 1.85 Million

– Value of HealthCor Management’s holding as of March 31: $132.18 Million

The healthcare-focused asset manager, run by two former SAC Capital traders, owned 1.85 million shares of Quest Diagnostics Inc. (NYSE:DGX) at the end of the January-to-March period, 1.33 million shares more than at the end of the December quarter. The 1.85 million-share stake was worth $132.18 million and made up 7.5% of the hedge fund’s entire portfolio. As venture capital-based firm Theranos, which sought to revolutionize the blood testing industry by bringing to the market low-cost tests, has been drowning in criminal and civil investigations over serious issues with the accuracy of the company’s blood tests, laboratory-testing company Quest Diagnostics may enjoy strong performance in the foreseeable future. The company has seen its market capitalization gain 9% since the beginning of the year. In late February, Quest completed the acquisition of the outreach laboratory service business of Clinical Laboratory Partners LLC for $135 million. Dmitry Balyasny’s Balyasny Asset Management added a 920,241-share position in Quest Diagnostics Inc. (NYSE:DGX) to its portfolio during the March quarter.

#1. Zimmer Biomet Holdings Inc. (NYSE:ZBH)

– Shares owned by HealthCor Management as of March 31: 1.50 Million

– Value of HealthCor Management’s holding as of March 31: $159.95 Million

Zimmer Biomet Holdings Inc. (NYSE:ZBH) also received some love from HealthCor Management during the January-to-March period, as the New York-based asset manager increased its stake in the company by 600,000 shares to 1.50 million shares. HealthCor’s largest equity holding was worth $159.95 million on March 31 and represented 9.1% of the firm’s portfolio. Earlier this month, the medical device market announced the pricing of a previously-announced secondary offering of 11.12 million shares owned by certain shareholders. The shares were sold to the public at an initial price of $115.85 per share, which put some weight on the stock’s performance (the stock had been trading above the aforementioned price before the announcement). Just recently, Zimmer Biomet also announced an agreement to acquire medical device maker LDR Holding Corp (NASDAQ:LDRH) for $1 billion. Zimmer Biomet shares have gained 15% so far in 2016. Daniel S. Och’s OZ Management acquired a new stake of 947,187 shares of Zimmer Biomet Holdings Inc. (NYSE:ZBH) during the first quarter of 2016.

Disclosure: None