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Move Over, Earnings, It’s Hedge Fund Season

Another earnings season has come and gone. Wal-Mart Stores Inc.’s (WMT) quarterly report last week marked the end of “the season” for S&P 500 companies.

But I’m already on to the next reporting season: hedge funds.

Every quarter, these secretive institutions disclose their long portfolios to the public in an SEC-mandated filing called a 13F.

Fund managers with more than $100 million under management are required to file a 13F within 45 days of the previous quarter’s close.

So, four times a year, the average investor has the invaluable opportunity to see where the “smart money” is deploying their capital.

And today, I’m going to dive into one of their favorite additions of the fourth quarter.

Just a Little Pin Prick?

Laboratory Corp. of America Holdings (LH) is the second-largest clinical lab company in the United States. Founded in 1971 and better known as LabCorp, the company performs a wide range of diagnostic and disease treatment services.

LabCorp operates 39 primary laboratories and approximately 1,750 patient service centers around the world.

Over the last 20 years, the stock has been a standout performer against the market. Since 1996, the stock gained 422% versus the S&P’s gain of just 197%.

Since 2010, LabCorp grew revenue by an average of 11%. And it’s driven earnings of 4.9% during that time, more than triple the rate of chief competitor Quest Diagnostics Inc. (DGX).

And last year, LabCorp completed a $6.2 billion purchase of pharmaceutical R&D giant Covance Inc. The purchase will contribute heavily to the company’s top line growth as well as reduce testing costs.

However, the firm struggled as several unrelated biotech scandals rocked the industry as a whole:

  • Valeant Pharmaceutical International Inc.’s (VRX) questionable financial reports.
  • The uproar over Turing Pharmaceuticals’ 1,000% Daraprim price hike.
  • And laboratory upstart Theranos Inc. came under fire late last year for the accuracy of its testing equipment.

From its 52-week high in July to its 52-week low just a few months later, the S&P Biotechnology Index fell 25% on these concerns.

But these external struggles have helped drive down LabCorp’s valuation in a big way.

The Funds Come Marching In

By the fourth quarter, LabCorp’s price-to-earnings ratio dropped to 17 – a discount to the market and the industry. The company’s price-to-book ratio fell to a 10-year low of 2.2.

And that’s when the “smart money” made their move…

Glenview Capital Management LLC added to its existing position by 1.32%, purchasing 791,223 shares. The institution now owns 8.6% of LabCorp.

Jana Partners LLC opened a new position, purchasing 696,034 shares – worth 1.2% of its long equity portfolio.

And Och-Ziff Capital Management Group LLC (OZM) bought up nearly 3 million LabCorp shares – a 2% ownership stake in the company. Och-Ziff is one of the world’s largest alternative asset managers with $45.5 billion under management.

Take Advantage of Another Markdown

The broad selloff that kicked off the year shaved even more off LabCorp’s share price. Shares are down 11% on the year.

The company now trades at 13.6 times forward earnings – nearly half the peer average.

From a technical perspective, momentum has shifted to the upside. Shares have just emerged from oversold territory off their January lows, with support along a five-year trend line.

Best of all, shares took a bullish bounce off their 20-day moving average.

If you’re bullish on health care, it’s time to put this Wall Street biotech favorite into your portfolio.

On the hunt,

Jonathan Rodriguez