Bank of America (BAC) Analyst Mary Ann Bartels recently came up with a report containing most popular stocks held by top 150 Hedge Funds (by Assets) according to their last quarter 13F filings. The following is a list of the top 10 most popular stocks among Hedge Funds in Healthcare sector.
Number of top hedge funds owning stock
JOHNSON & JOHNSON
EXPRESS SCRIPTS INC
MEDCO HEALTH SOLUTIONS INC
MERCK & CO INC
BIOGEN IDEC INC
My high conviction buy ideas among the above list are Pfizer, Wellpoint, Express Scripts, Merck and Biogen Idec.
Pfizer offers an attractive mix of inexpensive valuation, with forward P/E of just 9x; multiple catalysts in the form of Phase III data or FDA approval for many late-stage drugs; high FCF and dividend yield; and limited earnings risk.
Although the company's 2012 guidance disappointed some analysts, I believe it was lower mainly due to the FX headwinds, which are already baked into the stock price now. Further, management hinted that it was looking to manage its pharma business as two distinct entities, an innovative core pharma segment and value products division. As dynamics of these two groups will be made known, valuation could go up.
Cost synergies from the Wyeth (WYE) acquisition is another positive as the company works through its Lipitor expiration. The drug pipeline for 2012 seems solid with four new $1 billion plus products-- Eliquis, Xalkori, Prevnar and tofacitinib. Management is also committed to return cash to its shareholders, with $5 billion expected share buybacks and a dividend yield of 4%. Clearly, it is a quality company trading at an attractive 9x forward PE multiple and I will recommend buying the stock.
Wellpoint is currently trading at only 7.8x forward earnings, which is a 14% discount to its peers versus 1% premium it has historically traded at. I believe this is a very low valuation given the company's greater than 10% FCF yield and aggressive buy back plans. Wellpoint has the highest market share and best SG&A leverage in its peer group. I believe improved margins after CA exit and continued expense efficiency will lead to a multiple expansion for the company and it will reach a trading multiple inline with its peer group.
Express Scripts is likely to trade on the news of its merger progress with MHS in the near-term. The transaction is expected to bring $1.0+ billion in synergies that should fuel exceptional cash flow growth. Recently there have been some concerns that the Attorneys general of New York, Pennsylvania, Ohio, Texas, and California may file a suit if FTC approves the merger. However, I see it unlikely as there are hardly any precedents of states blocking transactions after FTC approval. The FTC has much deeper expertise in antitrust matters than a state AG, and it will be hard for state AGs to contest the FTC's decision.
The stock has corrected recently because of uncertainty over the deal. However, I believe any FTC concern could be addressed through modest divestitures, and the deal will likely be closed in April. I would recommend going long on the stock.
Merck & Co. is trading at a forward PE of just 10x forward PE, a discount to other major pharmaceutical companies. One of the reasons for Merck's lower valuation is its weak pipeline in terms of dollar contribution. However, one should note that Merck actually has the highest number of potential new launches and the least patent exposure in the group. Strong commercial launch of Victrelis and strong data from pipeline assets (i.e. Odanacatib, Tredaptive, Anacetrapib) could provide an upside.
Biogen Idec is a global biotechnology company focused on discovering, developing, manufacturing and marketing products for the treatment of neurological disorders and other serious diseases. The company's products include AVONEX, TYSABRI, FUMADERM and RITUXAN. Biogen is one of the best earnings reacceleration stories among big biotech. Continued strength in its core multiple sclerosis franchise, strong Avonex sales and several upcoming catalysts (dexpramiprexole in ALS, hemophilia A/B, and PEG-Avonex) make me bullish on the company.