Thursday, February 6, 2014

2013's Best Hedge Fund Manager?

Meena Krishnamsetty of MarketWatch reports, 2013's best hedge fund manager still picking winners:
We recently published our list of 2013’s best hedge fund managers. Michael Castor was at the top of the list because he picked eight stocks for us during four different interviews and five of those stocks returned more than 100% in under six months. We track a lot of hedge funds and we have never seen anything like this . Yesterday, his last pick in 2013, Furiex Pharma (FURX), surged 130%. On January 25th we published the January issue of our monthly newsletter and shared Castor’s latest assessment about Furiex:
FURX remains a good pick. There is a change—they earn a royalty on a diabetes drug sold by Takeda. The launch has been slower than I expected. I had initially thought that royalty stream to be worth $30 or so. I now think it is worth about $22. I continue to think the chance of success of eluxadoline is about 65% and that the value of the company with good clinical data is about $75. Mathematically, (65%)*($75) + (35%)*($22) = ~$56, so I like the stock at these levels, but it is high risk and has ~50% downside potential.

Furiex was a binary outcome play and Castor got a little bit lucky but this is what investing is. You make calculated bets where the odds are on your side. If your assessments are accurate you should be able to outperform the market on average. Our research has shown that hedge funds are able to outperform the market by an average of 18 percentage points a year by taking advantage of these asymmetric opportunities (read the details here).
After yesterday’s jump, Furiex’s cumulative return since Castor’s recommendation reached 175%. Now Michael Castor hit the bull’s-eye in 6 of his 8 recommendations in 2013. Let’s take a closer look at his remaining picks that didn’t double:

His worst performing recommendation was Aratana Therapeutics (PETX). The stock was trading at $15 in September when he recommended it. Today, it is trading at $21, up 40%. Castor thinks the stock may reach $40 in about three years, so this is a long-term play. Here is what he said about the stock in his investor letter:
Aratana develops medicines for pets. These drugs are relatively low-risk as there are already proof-of-concept data in humans. Moreover, human drugs must first be tested in animals, further providing evidence of safety and efficacy. Aratana’s model of in-licensing human medicines for pets should provide rich opportunities to expand the pipeline substantially over time.
Castor’s other pick that didn’t double was Cardinal Health (CAH). He recommended Cardinal Health last year when its CVS (CVS) contract was at risk. Here is what he said about CAH:
“The valuation of Cardinal is attractive, trading at about 12 times. Cardinal has an overhang, in that a large contract with CVS is up for renewal. Cardinal distributes what’s known as ‘bulk’ product to CVS, meaning huge crates of drugs to central locations. This is in contrast to the work Cardinal does for individual drugstores, where the company will drop off small volumes of drugs as the pharmacy needs them.

“In the case of ‘bulk’, CVS does the work of redistributing products to the individual store branches. Because Cardinal is simply delivering large crates, the markup and profit is small. So, on a revenue basis, it looks like it’s a big chunk of revenue that is at risk, but on an earnings basis, it’s much less significant.”
Cardinal Health was trading at $41 when we published Michael’s recommendation. Since then the stock returned 60%.

Last year we said the following about Michael Castor (our opinion hasn’t changed) in a MarketWatch article:

Overall, we like Michael Castor, and we especially like his small-cap stock picks. You should expect to hear his name and his successful stock picks often over the next few years.

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I added Michael Castor's hedge fund, SIO Capital Management, to the list of sector funds in my top funds quarterly review. You can view his entire holdings here and on Insider Monkey's site here.

I still think the Baker Brothers are the best biotech fund in the world and wrote about them in my hot stocks of 2013 and 2014:
I'm particularly bullish on biotech because I think if deflation does take hold, you want to be in sectors with pricing power. But biotech shares are very risky which is why I track the activity of top biotech investors, like the Baker Brothers, very closely to gain insights on individual companies. Shares of Pharmacyclics Inc. (PCYC) and ACADIA Pharmaceuticals Inc. (ACAD) have soared and I like some of their smaller holdings, like Idera Pharmaceuticals, Inc. (IDRA), BioCryst Pharmaceuticals, Inc. (BCRX), Progenics Pharmaceuticals, Inc. (PGNX) and XOMA Corporation (XOMA) where they hold a significant percentage of the float.

And last Wednesday, I told my readers to buy the dip Galena Biopharma, Inc. (GALE) Inovio Pharmaceuticals, Inc. (INO), noting Louis Bacon's Moore Capital Management took a position in the latter company (but it's a global macro fund not a biotech fund).

Boston Scientific Corporation (BSX) as part of the top performing stocks in the S&P 500 in 2013 or to see the strong performance in Rite Aid Corporation (RAD). There are many more stocks in these sectors that I think are going to rip higher in 2014.
My favorite biotech stock right now is Idera Pharmaceuticals, Inc. (IDRA). They issued more common stock yesterday and tweeted my followers to buy that morning dip because it might be the last time you will see it under $4. The stock was down 9% in the morning and closed up 9% on high volume (I suspect Baker Brothers added to their position). It will explode up if they announce positive results from their Phase III trials but in the short term, I want to see it make new highs.

Another stock I mentioned in my last comment on the Caisse blowing another $500M in the wind is Twitter (TWTR).  I told my readers I'm bullish but wait to see their first earnings report. The stock is down 23% in pre-market trading because their new user numbers are down. I guarantee you all the big hedge funds, including Chase Coleman's Tiger fund, are going to be buying this Twitter dip harder than a porn actor who popped 5 Viagra pills! Twitter remains my favorite social media stock and it will blow Facebook away over the next five years (mark it!).

But the best hedge fund of 2013 was LTK Capital Management, a small Montreal fund run by Leo Thomas Kolivakis. You never heard of it but it's run by a smart Greek Canadian with brains and balls who also happens to write the best blog on pensions and investments. He was up over 200% in 2013 and hardly traded at all, just kept adding to a few positions in his concentrated portfolio. And he doesn't charge 2 & 20 for leveraged beta and doesn't require the services of Tatiana at MCM Capital Management. You should all show your appreciation by donating to his blog on the top right-hand side of this site (don't be cheap, I can't stand cheap people and that includes some pension plutocrats and my close buddies who never listen to me!!).

Below, Michael Castor, founder of SIO Capital Management, talks about ways his portfolio is being impacted by the Supreme Court's decision to uphold the majority of President Barack Obama's health-care overhaul. Castor, speaking with Deirdre Bolton on Bloomberg Television's "Money Moves," also talks about the decision's effect on the medical community (June 2013).