In this article, via an analysis based of the latest available Q4 institutional 13-F filings, we identify the stocks in the medical systems & software group that are being accumulated and those being distributed by the world's largest fund managers. We have included in this group the providers of medical equipment, devices, and associated medical products, as well as medical software companies. These mega managers, managing between $50 billion and over $700 billion in 13-F assets, control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Taken together, they are bearish on the group, cutting a net $2.64 billion in Q4 from their $239.71 billion prior quarter holdings in the group.
The following are the medical systems & software group companies that these mega fund managers are most bullish about, that are undervalued compared to their peers, and that are also growing their revenues and earnings at a high rate (see Table):
Intuitive Surgical Inc. (NASDAQ:ISRG): ISRG, a pioneer in the field of surgical robotics, is the developer of the da Vinci Surgical System designed to aid surgeons in conducting minimally-invasive surgery by offering surgeons superior 3D HD visualization, enhanced dexterity, and greater precision and ergonomic comfort. A total of 29 mega funds hold 38.7% of the outstanding shares, with twenty funds buying and seven selling during the quarter. Also, together mega funds added a net $233 million in Q4 to their $8.28 billion prior quarter position in the company. The top buyer was mutual fund powerhouse Fidelity Investments ($269 million), and the top holder was Los Angeles based Capital World Investors, with over $262 billion in 13-F assets ($1.72 billion).
ISRG has been one of the best long-term performers among mid- and large-cap stocks in the healthcare space, up to about six-fold from the 2008/09 lows and up over 25-fold in the last seven-plus years. Its shares continue to be in new high territory, up about 21% YTD, and trading at 32-33 forward P/E and 7.6 P/B compared to averages of 36.3 and 11.8 for its peers in the medical instruments group, while earnings growth is expected to continue to be stellar, rising from $12.32 in 2011 to $17.36 in 2013 at an annual rate of 18.7%.
Quality Systems Inc. (NASDAQ:QSII): QSII is a provider of healthcare information systems software for medical and dental group practices. A total of twenty mega funds hold 46.8% of the outstanding shares, with thirteen funds buying and five selling during the quarter. Also, together mega funds added a net $124 million in Q4 to their $294 million prior quarter position in the company. The top buyers were Vanguard Group ($34 million), Fidelity Investments ($31 million) and Neuberger Berman Group ($31 million), with the top holder being Fidelity ($108 million).
QSII shares plunged this week, down almost 20%, in advance of and after the company announced downside guidance to revenue and earnings (24c-27c vs. 39c) for its Q4 (March) quarter on Thursday. The shares of this dividend-paying stock (2.3% yield) now sell at 17-18 forward P/E and 6.3 P/B compared to averages of 27.9 and 3.8 for its peers in the Medial Information Systems group, while earnings are projected to keep rising at a strong 27.8% annual rate from $1.06 in 2011 to $1.73 in 2013.
The following are some additional stocks in the medical systems and software group that mega fund managers accumulated in Q4 (see Table):
- Global biotech research tools and reagents provider Life Technologies Corp. (NASDAQ:LIFE), in which mega funds together added a net $301 million in Q4 to their $2.35 billion prior quarter position in the company;
- Medtronic Inc. (NYSE:MDT), that develops implantable cardiac rhythm devices, spinal implants and other device-based medical therapies, in which mega funds together added a net $199 million in Q4 to their $16.48 billion prior quarter position in the company;
- Merge Healthcare Inc. (NASDAQ:MRGE), that develops medical imaging, clinical workflow process and patient information management software applications, in which mega funds together added a net $7 million in Q4 to their $34 million prior quarter position in the company;
- Allscripts Healthcare Solutions (NASDAQ:MDRX), that is a provider of clinical, connectivity and patient information software applications for healthcare providers, in which mega funds together added a net $5 million in Q4 to their $960 million prior quarter position in the company; and
- Hologic Inc. (NASDAQ:HOLX), a developer of imaging systems and diagnostic and surgical products focused on the healthcare needs of women, in which mega funds together added a net $4 million in Q4 to their $2.02 billion prior quarter position in the company.
Besides these, mega fund managers based on their Q4 trading activity indicated that they are bearish on the following stocks in the medical systems & software group:
- Boston Scientific Corp. (NYSE:BSX), a developer of medical devices used in cardiology, endoscopy, oncology, neuromodulation and other interventional procedures, in which mega funds together cut a net $507 million in Q4 from their $4.76 billion prior quarter position;
- St. Jude Medical (NYSE:STJ), that develops cardiovascular medical devices for cardiac rhythm management, atrial fibrillation, cardiac surgery, cardiology and neuromodulation, in which mega funds together cut a net $503 million in Q4 from their $6.31 billion prior quarter position;
- Covidien Plc (COV), an Irish developer of medical devices, pharmaceuticals and imaging products, and medical supplies for the clinical and home settings, in which mega funds together cut a net $350 million in Q4 from their $11.74 billion prior quarter position;
- cardiovascular medical products company Edwards Lifesciences Corp. (NYSE:EW), in which mega funds together cut a net $316 million in Q4 from their $5.68 billion prior quarter position;
- Mako Surgical Corp. (NASDAQ:MAKO), that develops proprietary advanced robotic arm solutions and orthopedic implants used in minimally invasive orthopedic knee procedures, in which mega funds together cut a net $58 million in Q4 from their $289 million prior quarter position;
- Illumina Inc. (NASDAQ:ILMN), a developer of integrated systems for the large-scale analysis of genetic variation and biological function, in which mega funds together cut a net $37 million in Q4 from their $2.62 billion prior quarter position; and
- PSS World Medical Inc. (NASDAQ:PSSI), a specialty marketer and distributor of medical products and equipment to physician offices, long-term care facilities, and home care providers, in which mega funds together cut a net $24 million in Q4 from their $627 million prior quarter position.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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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