Top Undervalued Buys And Sells Of Healthcare-Focused Hedge Fund Healthcor Partners

by: GuruFundPicks

New York-based Healthcor Group, with $3.0 billion in public equity assets under management per its latest Q3 filing, was co-founded in 2005 by Arthur Cohen and Joseph Healey. The Group also manages approximately $300 million of assets dedicated to private equity, investing primarily in later-stage developmental and growing mid-sized companies in the healthcare sector. The firm was originally part of Stephen Cohen's SAC Capital Advisors, where the two co-founders met, and prior to that Cohen worked at Julian Robertson's Tiger Management.

The firm is well-known for its strong track record and fundamental, research-driven investment approach. Almost two-thirds of its assets are deployed in the healthcare sector, with most of the remaining third in healthcare-associated companies in other sectors such as medical insurance and software companies, and some in companies from other sectors that have a significant portion of their business in the healthcare sector. The fund is relatively concentrated in just 56 companies at the time of its 13-F Q3 filing, with a third in large-caps, another 40%-45% in mid-caps, and the remaining 20%-25% in small-cap and micro-cap equities.

Based on its most recent Q3 filing, the following are Healthcor's most bullish picks that are also trading at a discount compared to their peers (see Table):

Zimmer Holdings Inc. (ZMH): Zimmer develops orthopedic and dental reconstructive implants, and fracture management products. This was Healthcor's largest Q3 buy, adding a new $84 million position in the company. Zimmer shares are down over 20% since last summer, slightly above the average decline for medical device stocks. They trade at 10-11 forward P/E and 1.7 P/B compared to the averages of 20.4 and 3.7, respectively, for Zimmer's peers in the medical products group. The shares have recently perked up in the last two weeks after a positive announcement from a privately-held peer, orthopedic products manufacturer Biomet, Inc. This has raised speculation that the orthopedic markets may be stabilizing and possibly even improving.

Aetna Inc. (NYSE:AET): Aetna is a diversified U.S. health care benefits company offering a range of health insurance products and related services, including medical, dental, pharmacy, behavioral health, group life, and disability plans as well as medical management capabilities and Medicaid health care management. At $215 million, this is the second largest position in Healthcor's portfolio, including $30 million added in Q3. Aetna shares have fared well in recent years, currently trading within striking distance of their 3-year highs, and up almost three-fold from the depths of the 2008-09 market pullback, powered higher by earnings growth. Aetna trades at 8-9 forward P/E and 1.5 P/B compared to averages of 11.1 and 1.9, respectively, for its peers in the managed care group.

Corning Inc. (NYSE:GLW): Corning manufactures glass substrates for LCDs, optical fiber and cables for communications, and ceramic pollution control products. Its LCDs are used in high-performance displays for TVs and smartphones, including in the venerable iPad. This is one of few companies in Healthcor's portfolio outside of the core healthcare area. However, to its credit, Corning does have life sciences as one of its five segments. Healthcor added $13 million in Q3 to its $26 million prior quarter position in the company. Corning is undervalued, trading at less than 7 P/E on a TTM basis, and at 1.0 P/B and 5.5 P/CF compared to the averages of 26.1, 2.1 and 14.6, respectively, for its peers in the communications components group. Corning is down more than 40% below its $23 peak last February, mainly on account of weakness in its display technologies segment. Recently, Corning traded down more than 10% over lowering LCD glass volume guidance. Guidance will be up 5%-10% sequentially versus prior guidance of more than 20% volume growth.

The following are some additional healthcare sector companies that Healthcor is bullish about, but that are either incurring losses or, if profitable, then they are trading at a premium to the average valuation for the group (see Table):

Intermune Inc. (NASDAQ:ITMN): Intermune is a development-stage biotech company engaged in the development and commercialization of therapies in the areas of pulmonology and fibrotic diseases. Healthcor added $7 million in Q3 to its $9 million prior quarter position. Intermune currently generates huge losses, and is down about 75% from its highs in April last year. However, analysts are generally positive on the company, putting a mean price target of $32 on it, well above current prices in the $13 range. Also, of the sixteen analysts that cover the company, thirteen rate it at buy/strong buy, two at hold, and only one at sell.

St. Jude Medical (NYSE:STJ): St. Jude Medical develops cardiovascular medical devices for cardiac rhythm management, atrial fibrillation, cardiac surgery, cardiology and neuromodulation. At $67 million, this was the third largest buy in Q3 for Healthcor, as the firm initiated a new position in the company in its portfolio. St. Jude Medical shares currently trade near their lows, and are down over 35% from their highs of last April. Shares trades at a discount 9-10 forward P/E and 2.5 P/B compared to averages of 20.4 and 3.7 for the medical products group.

The following are healthcare sector companies that Healthcor is bearish about (see Table):

Amarin Corp. (NASDAQ:AMRN): Amarin is a clinical stage global pharmaceutical group. Ireland-based, the company develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies. Healthcor dropped its $13 million prior quarter position in the company in Q3. The stock is down by almost 70% from the highs in May last year, as the positive story surrounding its lead candidate AMR 101, a prescription-grade omega-3 fatty acid that aims to treat patients with high triglyceride levels, has continued to unravel.

Gilead Sciences Inc. (NASDAQ:GILD): Gilead is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases. Healthcor dumped its entire $42 million prior quarter position in Q3, its third largest sale in the quarter. Gilead shares have performed well recently, up over 15% in the past year as recent quarter operating results have beat estimates, and there is optimism about its deep pipeline of drugs under development. Its shares trade at a discount 10 forward P/E, and at 5.3 P/B, compared to averages of 22.2 and 11.3, respectively, for its peers in the biotech group. Furthermore, it is expected that Gilead's recent acquisition of Pharmasset Inc. (VRUS) will be a game-changer in terms of making Gilead a premier player in the hepatitis C space.

Tenet Healthcare Corp. (NYSE:THC): Tenet is an operator of 49 general hospitals and critical access hospitals in urban and rural communities in eleven states. Healthcor dumped its entire $39 million prior quarter position in the company in Q3. Tenet trades at a fair 9.8 forward P/E and at 1.6 P/B compared to averages of 9.8 and 1.6 for its peers in the hospital group.

Covidien Plc (COV): Covidien is an Irish developer of medical devices, pharmaceuticals and imaging products, and medical supplies for the clinical and home settings. Healthcor cut in half its $108 million prior quarter position, selling $54 million in Q3. Covidien trades at a discount 9-10 forward P/E and 2.2 P/B compared to averages of 20.4 and 3.7, respectively, for its peers in the medical products group.

Stryker Corp. (NYSE:SYK): Stryker is a developer of specialty surgical and medical products, including orthopedic implants, surgical instruments, imaging systems and operating room and emergency medical equipment. Healthcor dumped its entire $147 million prior quarter position in Q3. Stryker trades at 12-13 forward P/E and 2.6 P/B compared to averages of 20.4 and 3.7, respectively, for its peers in the medical products group.

Table (Click to enlarge)

Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.

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

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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.