Billionaire superinvestor George Soros is among the most closely watched figures in the investing world because he's been stunningly successful at consistently picking winners, and perhaps more importantly, avoiding big losers for a long period of time.
That's why the market activity of his hedge fund, aptly named Soros Fund Management, tends to garner special attention. And earlier this week, we learned -- via the 13F filings with the SEC -- which stocks Soros has been picking up in the fourth quarter.
Given that healthcare companies have been crushing the market as a whole over the last two years running, it's not surprising that 18.1% of the fund's total holdings were allocated to this single sector during the three-month period.
Turning to individual healthcare companies, Soros strongly favored the specialty drugmakers Allergan (NYSE:AGN) and Actavis plc (NYSE:AGN), as well as clinical-stage Kite Pharma (NASDAQ:KITE) in the fourth quarter, according to the 13F filings.
With this postmortem in hand, let's consider if these three stocks are compelling buys for the average investor.
Actavis' aggressive M&A strategy has fueled its hyperbolic growth
Ever since Actavis moved to Dublin in 2013 to lower its tax rate, the drugmaker has been on an acquisition frenzy, culminating in the massive $66 billion buyout of Botox-maker Allergan late last year. This "growth by acquisition" strategy has rewarded shareholders in a huge way, shown by the chart below:
At a recent investor day, Actavis' management estimated that the combined entity would generate roughly $25 per share in earnings by 2017, a projected growth rate of about 20% per year for the next two years.
Most importantly, though, this new megacap specialist pharma company is expected to sustain a 20% plus growth rate, in terms of adjusted EPS, for at least the next five years, driven by cost-cutting measures, financial synergies created by the merger, and the potential launch of several new drugs.
That's why growth-starved big pharmas like Pfizer have even been rumored to be interested in buying out the Actavis/Allergan duo. And probably why the Soros fund upped its position in Actavis by a staggering 117% to approximately $83 million worth of shares at current levels and opened up a massive $105 million position in Allergan.
While this growth story sounds compelling and Soros' massive positions in these stocks shouldn't be taken lightly, Actavis did pay a heavy premium for the Botox-maker. As history has repeatedly shown, megadeals in pharma -- especially when hefty premiums come into play -- often act like an anchor on the bottom-line, not a catalyst.
So, you may want to wait until this deal is finalized in the second quarter, and perhaps even check out a few subsequent quarters worth of earnings, before taking a position.
Kite is a speculative immunotherapy play
The Soros Fund bought more than 660,000 shares of Kite Pharma either through its IPO or soon thereafter, and added another 20,000 shares in the fourth quarter. And thus far, these buys look like pure genius:
The secret behind Kite's success is its lead clinical candidate, KTE-C19, indicated as a therapy for aggressive non-Hodgkin's lymphoma. In a small early stage study, the immunotherapy led to a 61% complete remission rate in patients with advanced B-cell malignancies and the remaining patients all exhibited some form of clinical benefit via either stable disease or partial remission.
Based on these promising results, Kite is advancing KTE-C19 into a larger midstage clinical trial, with the goal of launching the drug by 2017.
Kite also got a significant boost to start the year by signing a lucrative research agreement with Amgen to develop additional immuno-oncology candidates.
All-in-all, Kite looks like it could be on the fast track toward becoming a star in the smoking hot area of immunotherapy. Its stock, though, may not be a great buy at this point for the lay investor.
One of the core problems facing Kite going forward is that its therapeutic platform is only in the early stages of clinical testing, yet the company boasts a market cap of nearly $2.7 billion. Put simply, there is a huge hype factor built into this stock, and the significant risks of the often heartbreaking clinical trial process don't appear to be reflected in its present valuation.
Are these Soros healthcare picks good medicine for the average investor?
The merged entity of Actavis/Allergan has a real chance of being one of the first megamergers to actually work out for investors in the healthcare space. So, I think this new company will be worth keeping your eye on in the months ahead.
Kite, on the other hand, is clearly riding the immuno-oncology craze right now in light of its monstrous market cap, despite being years away from gaining a regulatory approval. That's not a great recipe for long-term success, keeping me planted firmly on the sidelines with this one.
George Budwell has no position in any stocks mentioned. 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.