Hedge Fund HealthCor's High Conviction Buys And Sells In Its $2.7 Billion 13-F Portfolio

Apr. 03, 2012 3:09 AM ETBAX, GLW, HUM, ELV, ARIA, ESRX, GILD, HCA, MCK, MHS, STJ, ZBH, WBA1 Comment
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New York-based hedge fund HealthCor Management, co-founded in 2005 by Arthur Cohen and Joseph Healey, manages $2.65 billion in 13-F assets, per its latest SEC Filing. 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. Besides public equities, HealthCor 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 is well-known for its strong track record and fundamental, research-driven investment approach. Almost three-quarters of its assets 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 54 companies at the time of its 13-F Q4 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.

We analyzed HealthCor's equity holdings in its Q4 13-F to determine its highest conviction bets (see Table), 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, that are also trading at a discount to the peers in their group (see Table):

Express Scripts Inc. (ESRX): ESRX is a provider of pharmacy benefit management services in North America, to managed care organizations, employers, insurers and administrators. This was HealthCor's largest buy in Q4, adding $119 million to its $1 million prior quarter position in the company. ESRX shares are surging today on news that the FTC, after an eight-month investigation, cleared its proposed merger with Medco Health Solutions (MHS), another company in HealthCor's portfolio in which it added a new $35 million position in Q4. ESRX shares are currently trading within striking range of its all-time highs at 13-14 forward P/E and 10.6 P/B compared to averages of 16.4 and 3.1 for its peers in the medical services group, while earnings are projected to grow from $2.96 in 2011 to $4.17 in 2013 at an annual rate of 18.7%.

St. Jude Medical (STJ): STJ develops cardiovascular medical devices for cardiac rhythm management, atrial fibrillation, cardiac surgery, cardiology and neuromodulation. This was HealthCor's second largest buy in Q4, adding $114 million to its $85 million prior quarter position. STJ shares currently trade at 11-12 forward P/E and 3.2 P/B compared to averages of 29.4 and 3.9 for its peers in the medical products group. In the latest Q4 it reported at the end of January, STJ beat analyst revenue and earnings estimates, but guided Q1 and FY12 EPS slightly below estimates; the company is scheduled to report its Q1 results two weeks from now, on April 18th.

Zimmer Holdings Inc. (ZMH): Zimmer develops orthopedic and dental reconstructive implants, and fracture management products. This was HealthCor's largest buy in Q3, and in Q4, HealthCor added another $80 million to its $103 million prior quarter position. ZMH shares have performed well this year, up almost 25% YTD, and in its latest Q4 reported at the end of January, it beat analyst revenue and earnings estimates; its shares currently trade at 11-12 forward P/E and 2.1 P/B compared to the averages of 28.7 and 3.9 for its peers in the medical products group.

Other high conviction buys by HealthCor, that are also trading at a discount to the peers in their group (see Table):

  • HCA Holdings Inc. (HCA), that operates 163 hospitals and 109 freestanding surgery centers in the U.S. and U.K., in which it added a new $71 million position;
  • Gilead Sciences Inc. (GILD), a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, in which it added a new $43 million position; and
  • McKesson Corp. (MCK), a provider of ethical drugs, health and beauty care products and medical supplies and equipment to pharmacies and hospitals, in which it added a new $27 million position.

Furthermore, HealthCor also added a new $24 million position in Ariad Pharmaceuticals Inc. (ARIA), that is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules.

The following are HealthCor's high conviction bearish picks based on its Q4 selling activity (see Table):

  • Humana Inc. (HUM), a provider of managed healthcare services through HMO, PPO and government contracts to about 11.2 million members in the U.S., its largest sell in Q4, in which it cut $205 million from its $206 million prior quarter position;
  • Wellpoint Inc. (WLP), a provider of managed healthcare services through PPO, HMO and POS, indemnity and other hybrid plans to 33.3 million members, in which it cut out completely its $73 million prior quarter position;
  • medical products and devices company Baxter International Inc. (BAX), in which it cut $73 million from its $74 million prior quarter position;
  • drug store retail chain operator Walgreen Company (WAG), in which it cut out completely its $63 million prior quarter position; and
  • Corning Inc. (GLW), a manufacturer of glass substrates for LCDs, optical fiber and cables for communications and ceramic pollution control products, with Its LCDs used in high-performance displays for TVs and smart phones, including in the venerable iPad, in which it cut out completely its $42 million prior quarter position.

Table

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 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.

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.

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