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In this article, via an analysis (based on the latest available institutional 13-F filings) of the investing activities of the world largest fund managers managing between $100 billion and over a trillion dollars, we identify the healthcare sector stocks that are being accumulated and those being distributed by these mega managers. We then crossed that data with the healthcare sector companies that are trading at value prices, based on their projected earnings for FY 2012 and the operating cash flow on a trailing-twelve-month (TTM) basis, and came up with a list of undervalued companies in the sector that are being accumulated by these mega fund managers, and those being distributed by them. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

We determined, based on our analysis, that mega fund managers are bullish on the healthcare sector. During the June quarter, these mega fund managers together added a net $2.01 billion to their $552.9 billion prior quarter position in the group, selling $41.53 billion and buying $43.54 billion worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.9. Taken together, mega funds have invested 10.9% of their capital in the casino group companies compared to the 12.6% weighting of the sector in the overall market. Earlier, in our review last month on the investing activities of legendary fund managers in the healthcare sector (ex-biotech), we determined that guru managers were slightly bearish on the healthcare sector and they were also underweight in the sector. Also, please note that since the investing activities of these legendary fund managers in small-cap biotech and mid- and large-cap biotech companies were covered separately by us in other articles, we only detail in this article the non-biotech healthcare sector companies that these legendary fund managers are most bullish or bearish about.

The following are the healthcare sector (ex-biotech) company stocks that mega fund managers accumulated the most in the recently reported June quarter, and that are also trading at a discount to their peers in the group based on forward P/E and price-to-operating-cash-flow (P/CF) on a TTM basis:

Covidien Plc (COV): COV is an Irish developer of medical devices, pharmaceuticals and imaging products, and medical supplies for the clinical and home settings. Mega funds added a net $6.09 billion to their $4.51 billion prior quarter position, and taken together mega funds hold 45.4% of the outstanding shares, significantly higher than their 27.3% weighting in the sector. The top buyers were Fidelity Investments ($1.61 billion) and Franklin Street Advisors ($328 million). The top mega fund holders, incidentally also the top overall holders of COV, were Fidelity Investments ($1.51 billion), Vanguard Group ($878 million), and JP Morgan Chase & Co. ($870 million) and State Street Corp. ($841 million) with 6.6%, 3.8%, 3.8% and 3.7% of the outstanding shares respectively. Earlier, in our review of guru fund managers investing in the healthcare sector, we determined that guru fund managers too were bullish on COV.

COV trades at a discount forward 11 P/E compared to the 29 average for its peers in the medical products group, and it trades at a 10.1 P/CF ratio that is also lower than the average 10.7 for the group.

Novartis AG (NVS): NVS is a Swiss developer of branded and generic pharmaceuticals, consumer health products, vaccines and diagnostics. Mega funds added a net $446 million to their $5.06 billion prior quarter position, and taken together mega funds hold 4.0% of the outstanding shares, significantly lower than their 27.3% weighting in the sector. This is understandable as NVS being Europe-based most likely has a significant number of Europe and Asia-based institutions holding company stock. The top buyers were Franklin Street Advisors ($382 million) and Neuberger Berman Group ($85 million), and the top mega fund holder was Dodge & Cox ($3.14 billion). Overall, 740 institutions hold 8.9% of the outstanding shares, with Dodge & Cox and PRIMECAP Management ($1.75 billion) being the top holders with 2.1% and 1.2% of the outstanding shares respectively.

NVS trades at a discount forward 10 P/E compared to the 12 average for its peers in the big pharmaceuticals group, and it trades at a 9.5 P/CF ratio that is slightly higher than the average 8.9 for the group.

Cardinal Health, Inc. (CAH): CAH is a distributor of pharmaceutical and medical products; operator of medical services facilities; and developer medical and surgical products including disposable kits, drapes, gowns and other products. Mega funds added a net $410 million to their $6.86 billion prior quarter position, and taken together mega funds hold 47.6% of the outstanding shares, significantly higher than their 27.3% weighting in the sector. The top buyers were Capital World Investors ($241 million), Fidelity Investments ($103 million) and Wells Fargo & Co. ($93 million). The top mega fund holders, incidentally also the top overall holders of CAH, were Wellington Capital Management ($1.52 billion) and Capital World Investors ($1.15 billion) with 10.6% and 8.0% of the outstanding shares respectively.

CAH trades at a discount forward 12 P/E compared to the 14 average for its peers in the retail and wholesale drug stores group, and it trades at a 9.2 P/CF ratio that is lower than the average 11.2 for the group.

The following are healthcare sector (ex-biotech) companies that these mega fund managers are most bearish about (see Table):

Pfizer Inc. (PFE): PFE develops branded prescription drugs for cardiovascular and metabolic diseases and other conditions. Mega funds cut a net $2.40 billion from their $50.79 billion prior quarter position, and taken together mega funds hold 30.9% of the outstanding shares, higher than their 27.3% weighting in the sector. The top sellers were Wellington Capital Management ($1.23 billion) and Goldman Sachs Asset Management ($407 million). Overall, 1,595 institutions hold 72.3% of PFE shares, with State Street Corp. ($6.16 billion) and Vanguard Group ($6.06 billion) being the largest holders with 4.1% and 4.0% of the outstanding shares respectively. PFE trades at a discount forward 9 P/E compared to the 12 average for its peers in the big pharmaceuticals group.

Merck & Co. (MRK): MRK develops prescription drugs to treat asthma, osteoporosis, cardiovascular, metabolic and other disorders. Mega funds cut a net $308 million from their $42.38 billion prior quarter position, and taken together mega funds hold 39.6% of the outstanding shares, significantly higher than their 27.3% weighting in the sector. The top sellers were Capital Research Global Investors ($821 million) and Goldman Sachs Asset Management ($528 million). Overall, 1,362 institutions hold 73.6% of MRK shares, with Capital World Investors ($6.95 billion), State Street Corp. ($4.23 billion) and Vanguard Group ($4.20 billion) being the largest holders with 6.5%, 4.0% and 3.9% of the outstanding shares respectively. MRK trades at a discount forward 9 P/E compared to the 12 average for its peers in the big pharmaceuticals group.

Johnson & Johnson (JNJ): JNJ develops health care products and provides related services to the consumer, pharmaceutical and medical markets. Mega funds cut a net $183 million from their $49.57 billion prior quarter position, and taken together mega funds hold 27.3% of the outstanding shares, approximately at par with their 27.3% weighting in the sector. The top sellers were Goldman Sachs Asset Management ($760 million) and AllianceBernstein ($278 million). Overall, 1,726 institutions hold 65.1% of JNJ shares, with State Street Corp. ($8.94 billion) and Vanguard Group ($6.80 billion) being the largest holders with 5.1% and 3.9% of the outstanding shares respectively. JNJ trades at a forward 13 P/E compared to the 12 average for its peers in the big pharmaceuticals group.

Medtronic Inc. (MDT): MDT develops implantable cardiac rhythm devices, spinal implants and other device-based medical therapies. Mega funds cut a net $380 million to their $12.73 billion prior quarter position, and taken together mega funds hold 33.3% of the outstanding shares, significantly more than their 27.3% weighting in the healthcare group. The top sellers were Bank of New York Mellon Corp. ($274 million), Capital World Investors ($146 million) and Capital Research Global Investors ($141 million). Overall, 1,042 institutions hold 76.5% of MDT shares, with Vanguard Group ($1.64 billion), Wellington Management ($1.60 billion), and PRIMECAP Management ($1.49 billion) being the top holders with 4.5%, 4.5% and 4.2% of the outstanding shares respectively. MDT trades at a discount forward 9 P/E compared to the 29 average for its peers in the medical products group.

Boston Scientific Corp. (BSX): BSX is a developer of medical devices used in cardiology, endoscopy, oncology, neuromodulation and other interventional procedures. Mega funds cut a net $647 million to their $4.96 billion prior quarter position, and taken together mega funds hold 47.8% of the outstanding shares, significantly more than their 27.3% weighting in the healthcare group. The top sellers were Goldman Sachs Asset Management ($293 million), Invesco Ltd. ($259 million) and Capital Research Global Investors ($162 million). Overall, 489 institutions hold 86.8% of BSX shares, with Capital Research Global Investors ($747 million) and Dodge & Cox ($682 million) being the top holders with 8.6% and 7.8% of the outstanding shares respectively. BSX trades at a discount forward 12 P/E compared to the 29 average for its peers in the medical products group.

Table



General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

Disclosure: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Undervalued Healthcare Sector Fund Manager Picks