Malvern, PA-based The Vanguard Group manages approximately $1.6 trillion in assets, including $741.0 billion in 13-F assets per its latest Q1 filing with the SEC last week. It is one of the largest institutional investors, accounting for about 4% of the total market capitalization of the U.S. equity markets. Its investment in the healthcare and tech sectors alone amounts to over $200 billion, more than the entire 13-F assets of most institutional investors that are focused on the healthcare and/or tech sectors.
Vanguard offers mutual funds and other financial products and services, including ETFs, individual retirement accounts, college savings accounts, variable annuities, and also personal advisory services to its clients. Its assets are well-diversified into over 3,700 positions, with two-thirds deployed in large-caps, another 20% in mid-caps, and the remaining 10%-15% in small-cap equities. It holds positions in most mid- to large-caps as well as many small-cap healthcare and technology companies. Hence, we focused our efforts on analyzing the equity holdings in its Q1 2012 13-F to determine its highest conviction bets by sector, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company.
Based on that analysis, the following are its high conviction bullish positions in the healthcare and technology sectors, that are also projected to have strong growth rates going forward (a prior article on their high conviction bets in the basic materials and energy sectors can be accessed by clicking on the above hyperlink):
Jazz Pharmaceuticals (JAZZ): JAZZ develops specialty drugs to treat unmet medical needs in neurology and psychiatry. Vanguard added $53 million in Q1 to its $44 million prior quarter position. Other leading institutions that made large bullish bets on JAZZ in Q1 included mutual fund powerhouse Fidelity Investments adding 4.9 million shares to its 0.2 million share prior quarter position, and Denver, CO-based mutual fund powerhouse Janus Capital Management adding a new 2.9 million share position. Overall, funds added a net 13.1 million shares in Q1, buying/adding 19.6 million shares and selling/decreasing 6.5 million shares.
JAZZ was initiated Wednesday at an Outperform by Oppenheimer, with a price target of $66, well above current price in the $44 range, based on the potential of its XYREM treatment for nacrolepsy, that is a chronic sleep disorder characterized by daytime sleepiness. Its shares have been among the top mid-cap gainers in the biotech group since the market bottomed out in early 2009, with shares rising almost 100-fold from the lows in the 50c range at the nadir in spring of 2009. The shares currently trade at 7-8 forward P/E and 3.2 P/B compared to averages of 25.8 and 7.1 for its peers in the medical drugs group, while earnings are projected to rise at a strong 25.8% annual rate from $3.52 in 2011 to $5.57 in 2013.
We wrote about JAZZ in mid- to late-October after the company received an FDA warning letter citing multiple safety violations, opining in that piece that we viewed the sell-off as creating an opportunity to buy into this high-growth stock at discount prices, and recommended accumulating if prices fell into the low- to mid-$30s; since that recommendation, shares rose over 60% at the highs last month.
Zynga Inc (ZNGA): ZNGA develops, markets and operates online social games, making them available worldwide on various platforms, including Facebook (FB), MySpace and Yahoo (YHOO), as well as the iPad, iPhone and Android devices. Vanguard added a new $38 million position in Q1. Other leading institutions that made large bullish bets on ZNGA in Q1 included Morgan Stanley that ended Q1 with a 32.8 million share position, Los Angeles-based mega fund Capital Research Global Investors with a 16.5 million share position, and Denver, CO-based mutual fund powerhouse Janus Capital Management with a 12.5 million share position.
ZNGA reported its Q1 (March) about a month ago, beating analyst revenue and earnings estimates (6c v/s 5c), and guiding FY 2012 EPS in-line. Its shares, already weak prior to the report, dropped even more following the report. Recently, last Friday, shares plunged even further into all-time low territory, as the failed Facebook IPO (FB) is casting a negative shadow on the entire group, with ZNGA being particularly vulnerable as it derives most of its revenue from FB.
Earlier, in March, we cautioned that buying ZNGA and other social media companies at high valuations based on comparables was risky and reminiscent of the arguments made in the late 90s. However, with the recent drop in the price, the shares now trade at 19-20 forward P/E, which seems reasonable given the projected 24% annual revenue growth and 43% earnings growth from FY 2011 and 2013. We would wait, however, for a technical bottom to be formed, which based on the last couple of days of action may be in the process of forming.
The following are additional healthcare and tech sector stocks that Vanguard is bullish about, accumulating shares in them in Q1 2012 (see Table):
- Crown Castle International (CCI), that operates wireless towers in the U.S., Australia and Puerto Rico for wireless service providers, in which it added $195 million in Q1 to its $415 million prior quarter position;
- Amylin Pharmaceuticals (AMLN), that develops drugs for the treatment of diabetes, obesity and other diseases, in which it added $33 million in Q1 to its $176 million prior quarter position;
- Taiwan Semiconductor ADR or TSMC (TSM), that is the world's largest dedicated IC foundry manufacturing logic and mixed-signal ICs for fabless semiconductor companies and integrated device manufacturers, in which it added $116 million in Q1 to its $826 million prior quarter position;
- Seagate Technology (STX), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets, in which it added $54 million in Q1 to its $397 million prior quarter position;
- Alkermes Plc (ALKS), an integrated biotech company, develops injectable and oral products for the treatment of central nervous system disorders, addiction, diabetes and autoimmune disorders, in which it added $21 million in Q1 to its $79 million prior quarter position; and
- Specialty pharmaceutical company Valeant Pharmaceuticals International Inc. (VRX), in which it added a new $9 million position in Q1.
Also, the following are additional healthcare and tech sector stocks that it held a major position in the prior quarter, further adding to them in Q1 2012 (see Table):
- Apple (AAPL), probably among the most innovative companies the world has ever known, and one of the world's largest manufacturers of personal computers, mobile communication devices, and portable digital music players, in which it added $1.03 billion in Q1 to its $20.97 billion prior quarter position;
- Microsoft Corp. (MSFT), that is the world's leading software company, developing operating systems, business software and other applications for servers, PCs and intelligent devices, in which it added $444 million in Q1 to its $9.13 billion prior quarter position; and
- multinational technology and consulting company International Business Machines (IBM), in which it added $289 million in Q1 to its $9.94 billion prior quarter position.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, 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, but may initiate a long position in ZNGA over the next 72 hours.
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