The healthcare sector, as represented by the Health Care Select Sector SPDR (XLV) has outperformed the general market this year, up over 10% YTD compared to the 8% rise for the general market. Within the group, the S&P Health Care Equipment SPDR (XHE), probably more representative of medical technology stocks (ex-biotech), is up an even more impressive 15% YTD, with many leading stocks in the group up even more. In this article, via an analysis based on the latest available Q1 institutional 13-F filings, we identify the medical technology stocks (ex-biotech) that are being accumulated and those being distributed by the world's largest fund managers.
These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the medical technology group, adding a net $50 million in Q1 to their $156.20 billion prior quarter position in the group. However, overall they are still under-weight the group by a factor of 0.7; that is, taken together, the 25 mega funds have invested 2.3% of their assets in the group, less than the 3.2% weighting of the medical technology group in the overall market (for more general information on these mega funds, please look at the end of the article).
The investing activities of these mega fund managers in bio-tech companies were covered in prior articles, separately for micro-cap biotech, small-cap biotech, mid-cap biotech and large-cap biotech companies. Also, our coverage of the group in the prior quarter can be found here. The following are the medical technology companies, ex-biotech, that these mega fund managers are most bullish about (see Table):
Align Technology Inc. (ALGN): ALGN is a medical device company that develops its proprietary Invisalign System for treating malocclusion or misalignment of the teeth. Mega funds together added a net 4.42 million shares in Q1 to their 21.15 million share prior quarter position in the company, and taken together mega funds held $793 million or 31.8% of the outstanding shares.
The top buyer was mutual fund powerhouse Fidelity Investments, with $555 billion in 13-F assets, that purchased 2.21 million shares. Other large mega fund purchasers included Wells Fargo & Co. (1.07 million shares), with $157 billion in 13-F assets, and the world's largest and most prominent asset manager, BlackRock Inc. (0.37 million shares), with over $3.5 trillion in assets under management. Overall, institutional investors added 3.4 million shares to their 59.5 million share prior quarter position.
In its latest Q1 (March), ALGN beat analyst revenue and earnings estimates (27c v/s 21c), and guiding Q2 revenues and earnings above estimates (26c-28c v/s 24c). Its shares currently trade at 23-24 forward P/E and 4.7 P/B compared to averages of 27.3 and 5.9 for its peers in the medical/dental supplies group. Earnings, meanwhile, are expected to continue growing at a brisk pace from 97c in 2011 to $1.34 in 2013, at an average annual rate of 17.5%. The stock has risen to almost seven-fold from the lows in 2008-09 based on earnings improvement, that are up almost three-fold from the lows.
The company serves a severely under-penetrated malocclusion (or mis-alignment of the teeth) market, with currently only a few million of the more than billions of patients affected by the condition seeking treatment every year. While this signals that the company can continue on its brisk growth pattern for the foreseeable future, particularly as it now shifts its focus to overseas markets, competition is beginning to become fierce and is expected to hurt profit margins going forward. Also, the macro-economic backdrop in terms of the weakening domestic and worldwide economy does not bode well for a procedure that is generally elective in nature. We believe that at current prices, the stock is fairly valued, and would wait for a pull-back into the mid-$20's before loading up on this long-term growth story stock.
Other medical technology companies (ex-biotech) that mega fund managers are bullish about include:
- Medtronic Inc. (MDT), that develops implantable cardiac rhythm devices, spinal implants and other device-based medical therapies, in which mega funds together added a net 8.47 million shares to their 395.70 million share prior quarter position in the company; and
- St. Jude Medical (STJ), that develops cardiovascular medical devices for cardiac rhythm management, atrial fibrillation, cardiac surgery, cardiology and neuromodulation, in which mega funds together added a net 6.31 million shares to their 151.39 million share prior quarter position in the company.
The following are medical technology companies (ex-biotech) that mega funds are bearish about (see Table):
- Qiagen NV (QGEN), that develops technologies for the isolation, purification and analysis of DNA, RNA and proteins in biological samples, in which mega funds together cut a net 4.33 million shares from their 40.77 million share prior quarter position in the company;
- Athenahealth Inc. (ATHN), that is a provider of internet-based billing, collections, and medical record management software and services for physician practices, in which mega funds together cut a net 0.88 million shares from their 23.57 million share prior quarter position in the company; and
- Quality Systems Inc. (QSII), that is a provider of healthcare information systems software for medical and dental group practices, in which mega funds together cut a net 1.32 million shares from their 12.92 million share prior quarter position in the company.
Furthermore, the following are other notable medical tefchnology companies (ex-biotech) that are among the top holdings of mega funds in the group, relative to their market-cap (see Table):
- Complete Genomics Inc. (GNOM), that is a life sciences company that is engaged in the development and commercialization of an innovative DNA sequencing platform that can provide customers with data that is ready to be used for genome-based research, in which mega funds together hold 1.74 million or 5.1% of the outstanding shares;
- Mako Surgical Corp. (MAKO), that develops proprietary advanced robotic arm solutions and orthopedic implants used in minimally invasive orthopedic knee procedures, in which mega funds together hold 11.02 million or 25.9% of the outstanding shares;
- Antares Pharma Inc. (ATRS), that is a developer of trans-dermal and intra-dermal therapeutic delivery systems, including needle-free and mini-needle injector systems and gel technologies, in which mega funds together hold 14.03 million or 13.5% of the outstanding shares; andMmodal Inc.(MODL), that is a provider of integrated clinical documentation solutions to hospitals, clinics and physician practices, in which mega funds together hold 5.25 million or 9.2% of the outstanding shares.
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 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.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: 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.