By Jake Mann
As a whole, the healthcare sector has been booming of late, returning 7.8% year-to-date. This aggregate-level appreciation trumps even financial services and consumer cyclical stocks, making this space the highest escalating sector in the economy over this time frame. While it's tempting to grab an index fund to ride out this growth for the remainder of 2013, we think you can do better. Specifically, by looking at which healthcare stocks are loved by hedge funds and corporate insiders.
Research has proven that both of these groups can outperform the market handily (see details here), so using this type of sentiment can do wonders for your portfolio. Each of these stocks listed below have experienced at least one insider purchase in the past 90 days, and are ranked in order of their preference among the 400-plus hedge funds we track.
First up on our list is UnitedHealth Group (UNH), which holds interest from approximately 12% of our hedgie universe. The company has also seen two insiders buying shares since last November. Investors' opinions of the Affordable Care Act's potential effects on UnitedHealth are mixed, though it's worth noting that S&P holds a positive outlook on the managed healthcare sub-industry.
Equally as important, Wall Street's average price target on UnitedHealth represents a 15-16% upside from current levels. Trading at a sub-1.0 PEG with a dividend yield near 1.5%, there are plenty of reasons for value and income-seeking investors to like this stock.
Aetna (AET), next up on our list, has interest from slightly fewer players in the hedge fund industry, though many big names-including David Einhorn (see Einhorn's full portfolio), Barry Rosenstein and Ken Griffin-are still bullish. Shares of the healthcare benefits company have already popped 3.4% since VP Karen Rohan bought stock one week ago. Over the longer run, Aetna has come close to hitting double-digit appreciation over the past year, and a forward P/E below 9 should bring many value investors into the fold.
Boston Scientific (BSX) sits at No. 3 on our list, and 8% of the hedge funds we track are bullish. Director Nj Nicholas bought 45,000 shares of BSX stock in mid-November, and since this round of purchasing activity began, the heart device maker's market cap has popped by 49.4%.
Boston Scientific is a perfect example of why retail investors should pay attention to insider trading sentiment, and much of this growth has been driven by a bullish current-quarter guidance boost and a new $1 billion stock repurchase plan. Hedge fund managers Leon Cooperman and Jeffrey Vinik, among others, are set to benefit from this positive momentum.
Rounding out the top five we have DaVita HealthCare Partners (DVA) and Covidien (COV). DaVita became DaVita HealthCare Partners after acquiring the latter last year, and the merger was finalized in November. Since this deal became official, shares of DVA have risen by 5.2%, rewarding mega-investor Warren Buffett (see Buffett's full portfolio), who first invested in the company back in 2011. Berkshire's continuous purchasing activity over the past three months qualify as insider buying, as the firm is classified as a Large Shareholder by the SEC-technically an "insider." Now, DaVita's stock doesn't look to be overbought at current levels, and the sell-side is forecasting EPS growth this year of 26.9%.
Covidien, meanwhile, is expected to see the same macroeconomic tailwinds as the rest of the healthcare stocks discussed above, and the medical devices company has already risen 9.8% year-to-date. Covidien is a favorite of about 6% of the hedge funds we track, including D.E. Shaw and Richard Driehaus. Moreover, Director Joy Amundson was buying a sizable amount of COV stock late last year, predating most of its recent appreciation. Trading at a 20% discount to its industry's average book value while paying a dividend yield near 1.5%, it's difficult to ignore Covidien's attractiveness.