Under-the-Radar Hedge Fund Focusing on Pharma
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Hedge funds are typically thought of as being billion dollar funds managed by Harvard MBAs and alums of some of Wall Street’s more prestigious analyst programs (i.e. Goldman Sachs, JP Morgan). Interestingly, Dafna Capital Management is rather small (only $63 million) and is managed by Dr. Nathan Fischel MD and his wife, a biomedical engineer. So why are we even talking about Dafna? Because according to the most recent data compiled by Insider Monkey, Dafna’s equity portfolio was one of the best 10 of those we track last year.
More importantly, it’s always beneficial to track the smart money’s sentiment, and our market-beating strategies explain this “truth” quite nicely (learn the details here).
First in this hedgie’s top five is Pharmacyclics (NASDAQ: PCYC). The stock rallied to a 13-year high of $77.03 after the FDA gave the drug-maker a “breakthrough” designation, a distinction that leads to faster approvals for new drugs to hit the market. The news is expected to hasten the FDA’s approval of Pharmacyclics’s Ibrutinib, a cancer-drug that that blocks the enzyme that causes certain cancers to spread, such as non-Hodgkin lymphoma. As a result of the recent rally, the stock is priced very expensive compared to the rest of this sector, but all of its other financials are extremely bullish—revenue, net income, EPS, for example—and will continue to improve once Ibrutinib comes to the market.
Sitting at No. 2 is YM Biosciences (UNKNOWN: YMI.DL). YM Biosciences was purchased by Gilead Sciences for $2.95 a share in February, and at the time Dafna first added YM to its portfolio in Q2 2011, the stock was trading below the $2 mark; not a bad gain for a two-year investment. Michael Hintze and John Thiessen were a couple other fund managers invested in this company heading into 2013; see the complete list here.
Third up is Novadaq Technologies Inc (NASDAQ: NVDQ). Novadaq rallied earlier this year following a very strong earnings report. Sales devoted to costs improved from 45% to 39%, and Q4 gross profit improved 56% from the same period last year. However, after hitting a high of $10.80, the stock’s momentum seems to be slowing down, and it has stalled above the $10.50 level. Technicals are neutral-to-bearish, and there isn’t any bullish news for Novadaq in the pipeline. Dafna’s position in the stock was reduced by 8% in the latest quarter, and we’d watch this stock very carefully moving forward.
Fourth in Dafna’s top five is Insulet (NASDAQ: PODD), a medical devices manufacturer which specializes in insulin pumps, blood-glucose testing supplies and other products for the treatment of diabetes. Like Novadaq, a positive earnings report for the fourth quarter drove the stock to a solid level—above $24.00 in this case. Although there was some light profit taking, the stock is maintaining most of its gains. On the downside, Insulet is priced at a premium to the rest of the medical-device industry and more established competitors in the diabetes devices market will continue to offer strong competition.
Fifth in this hedgie’s top five is Ariad Pharmaceuticals (NASDAQ: ARIA). The cancer-drug maker recently endured a steep drop in mid-December following the announcement that the FDA approved the drug Iclusig for the treatment of bone marrow and a rare blood cancer. So why did Ariad shares fall on good news? Most was likely on profit taking regarding recent gains prior to the announcement, but also because before Ariad can begin to return a profit on the drug, it will likely take 8-10 years. And with the stock currently priced 6x over the industry average, the stock is very expensive compared to competitors. Dafna reduced its holdings in Ariad by 11% last quarter.
Dafna Capital Management proves that you don’t have to be a Wall Street trader or stock guru to manage a very profitable fund. Dr. Fischel is obviously a follower of the adage “stick with what you know” and it has paid off very handsomely.
This article is written by Amy Thielen and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!