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15 Best Small-Cap Healthcare Stocks to Buy

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Ma’k Almario
·11 min read
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In this article, we present the 15 Best Small-Cap Healthcare Stocks to Buy. If you’re in a hurry, click to skip ahead and see the 5 Best Small-Cap Healthcare Stocks to Buy.

The term small cap can be used to define established companies with a small market capitalization ranging anywhere between $300 million and $2 billion. While we define the term healthcare as an organization that provides medical care and attention to an individual. In a recent article, we covered the Top 10 Large-Cap Healthcare Stock to Buy Now.

Investing in small-cap stocks can be tricky. Risk and volatility are inevitable. However, the fact that these stocks have a smaller size may mean more room for upside potential given the circumstances. For instance, the average return for the Russell 2000 is 15% in the year after a presidential election since 1980. Which is around 4% better than the large-cap stocks. Small caps also tend to outperform large caps when coming out of an economic recession and when expectations of economic growth go from bad to less bad, and eventually to good, the greater economic sensitivity given by small caps can be helpful to a more rapid recovery.

15 Best Small-Cap Healthcare Stocks to Buy
15 Best Small-Cap Healthcare Stocks to Buy

beerkoff/Shutterstock.com

On the other hand, investing in healthcare stocks can be very rewarding given the significance it has to the economy. In the US, the healthcare sector will account for 19.4% of GDP in 2027. The number is an increase from 17.9% in 2017. The COVID-19 pandemic has further exemplified the importance of the healthcare sector in finding solutions to ending the pandemic. According to an article from the Health System Tracker, healthcare workers now account for a larger share of the employed workforce which went from 10.8% in February up to 11.5% in May.

The Biden Administration commits to the Affordable Care Act which will add Medicare-like public options that will allow a greater number of consumers to receive health insurance. We also like small-cap healthcare stocks (like biotech or gene technology stocks) because that's where a large number of cutting edge research is done. Combining small-cap stocks that have the possibility for major growth and health care stocks that provide innovative solutions to the economy today may be one of the solutions to a portfolio with great growth potential.

In order to identify the 15 Best Small-Cap Healthcare Stocks to Buy we started with the 73 holdings in the PSCH- Invesco S&P SmallCap Health Care ETF as of February 5, 2021, and we were able to narrow down our list to 15 stocks using the hedge fund sentiment data.

Our in-house research showed that by using the hedge fund sentiment data, we can identify a small group of stocks that can outperform the S&P 500 index on average by double digits annually. For instance, the portfolio for stock picks for our monthly newsletter has beaten the market by over 111 percentage points since March 2017 (see details here). Some of the portfolio choices for our monthly newsletter were also publicly shared on our website. In October, we posted this real estate stock and since then it’s been up more than 60 percent.

Based on our hedge fund sentiment data, we present to you the 15 best small-cap healthcare stocks to buy now among 800+ hedge funds tracked by Insider Monkey:

15. REGENXBIO Inc (NASDAQ:RGNX)

No of HFs: 22

Total Value of HF Holdings: $144 Million

The 15th best small-cap healthcare stock to buy is RGNX. At the end of September, a total of 22 hedge funds tracked by insider monkey were long this stock. RGNX is one of the leading clinical-stage biotechnology companies in the world. They recently announced their agreement to monetize a portion of Zolgensma's royalties for $200 million. Their rapidly expanding internal pipeline has helped them to expand the potential effect that gene therapies can have on both large and orphan indicators for patients.

14. Integer Holdings Corp (NYSE:ITGR)

No of HFs: 22

Total Value of HF Holdings: $145 Million

Ken Fisher’s Fisher Asset Management is one of the top hedge funds having positions in ITGR, which had $41 million invested in the stock at the end of September. An insider recently purchased 5,000 shares at around $58 in November 2020. The stock is up 85% since then. Diamond Hill Capital mentioned ITGR in its Q1 2020 investor letter:

“We took advantage of the market downturn to add shares of medical device contract manufacturer Integer Holdings Corp. at a level below our estimate of intrinsic value. Since the Lake Region Medical acquisition in 2015, Integer has been working through the integration, and in the last couple years management has made great strides to improve the business through innovation and driving manufacturing efficiencies.”

13. Cardiovascular Systems, Inc. (NASDAQ:CSII)

No of HFs: 22

Total Value of HF Holdings: $155 Million

At the end of September, a total of 22 hedge funds tracked by Insider Monkey were long this stock. One of the biggest hedge funds saving stakes in the company is Jim Simon’s Renaissance Technologies which had $65 million invested in the stock at the end of September. An insider recently purchased 200 shares at around $32 in August 2020. The stock is up 28% since then. They recently entered into a partnership with Chansu Vascular Technologies, LLC to create a new peripheral and coronary everolimus drug-coated balloon (DCBs).

12. Vanda Pharmaceuticals, Inc. (NASDAQ:VNDA)

No of HFs: 22

Total Value of HF Holdings: $170 Million

VNDA is the 12th best small-cap healthcare stock to buy. VNDA is a global biopharmaceutical company that focuses on developing therapies to address unmet medical needs in central nervous system disorders. The company recently received FDA approval to proceed with investigational new drug VSJ-110 for allergic conjunctivitis.

11. Community Health Systems, Inc. (NYSE:CYH)

No of HFs: 22

Total Value of HF Holdings: $194 Million

Chen Tianqiao’s Shanda Asset Management is one of the top hedge funds having positions in CYH, which had $116 million invested in the stock at the end of September. An insider recently purchased 2,500 shares at around $4 in March 2020. The stock is up 125% since then. CYH is one of the leading operators for general acute care hospitals. The company priced an offering of $1.775 billion aggregate principal amount of its 6.875% Junior-Priority Secured Notes that are due in 2029.

10. Corcept Therapeutics, Inc. (NASDAQ:CORT)

No of HFs: 22

Total Value of HF Holdings: $238 Million

At the end of September, a total of 22 hedge funds tracked by Insider Monkey were long this stock. An insider recently purchased 68 shares at around $22 in December 2020. The stock is up 31% since then. CORT is a pharmaceutical company that is engaged in the research and development of cortisol modulators. In 2020, the company reported a revenue of $353.9 million, a 15% increase as compared to 2019.

9. MEDNAX Inc. (NYSE:MD)

No of HFs: 22

Total Value of HF Holdings: $338 Million

Jeffery Smith’s Starboard Value LP is one of the top hedge fund holders having positions in MD, which had over $137 million invested in the stock at the end of September. An insider recently purchased 61,204 shares at around $21 in August 2019. The stock is up 33% since then. Silver Ring Value mentioned the stock in its Q4 2020 investor letter:

“Mednax is a business that I have followed for many years. The crown jewel is the pediatric business, in which the company provides physician staffing to neonatal intensive care units (NICUs) and related specialties at various hospitals. It’s a business with a strong competitive advantage given the company’s dominant position, very inelastic demand and limited reimbursement risk.

The pediatric business has moderate organic growth characteristics, which the prior management supplemented with many tuck-in acquisitions over the years. These acquisitions leveraged the back office scale while allowing the local physician groups’ autonomy of operation.

Unfortunately, the company eventually ran out of meaningful acquisitions to make in this space, and the old management was unsatisfied with simply running a very entrenched, high ROIC and FCF business and returning capital to shareholders. Instead, they took on extra debt to pursue growth through acquisitions in what they considered to be adjacencies: first in anesthesiology and then in radiology.

Not surprisingly, these adventures outside the company’s area of core competitive advantage didn’t go well. Debt piled up far faster than profits. This led to an activist investor nominating directors to the board, and then the board replacing the CEO.

The new CEO was previously the CEO of Quality Care Properties. This was a company where he improved performance over this 2-year tenure and which he then sold at an attractive price. His first steps at Mednax were simple: sell off the non-core divisions and reduce debt.

I made the investment after the sales were completed, leading to a clean balance sheet and the company returning to its roots as a pediatric-centered company. This company doesn’t screen well to many investors since its historical financials are messy and are obscured by the old businesses (now sold) and the seemingly large debt pile (already reduced). This is a perfect set-up: the nature of the business is different than what most investors believe it to be based on a superficial assessment.

The new management is now focused on improving efficiencies and running the core business better. I would not be surprised if the ultimate plan were to sell the company in a few years at a nice profit. However, I am not banking on that, and would be equally happy if management just executes on its low-risk plan of running the business well within its area of competitive advantage.

I purchased the stock at less than 10x normalized EPS for a business that I believe is likely to grow mid-single digits long-term. I paid ~ 65% of my base case value with ~ 35% downside to my worst case. I believe the Business Quality to be Excellent (1 out of 5), Management Quality to be Above Average (2 out of 5) and Balance Sheet to be Above Average (2 out of 5).

In the short-term, birth-rates, a key driver of demand, are likely to be negative. This may create quarters where the company reports results lower than Wall Street expectations. I am not at all concerned or deterred by that. If anything, I would be happy to add to the position if such an event occurs and the market over-reacts given our long-term investment horizon.”

8. Natus Medical Inc (NASDAQ:NTUS)

No of HFs: 24

Total Value of HF Holdings: $72 Million

NTUS is the 8th best small-cap healthcare stock to buy. An insider recently purchased 100 shares at around $27 in March 2019. The stock is down 7% since then. NTUS is a medical equipment supplier for the treatment of impairments and disorders affecting newborns. The company recently acquired Babybe GmbH and its innovative newborn care technology.

7. Coherus Biosciences, Inc. (NASDAQ:CHRS)

No of HFs: 24

Total Value of HF Holdings: $224 Million

One of the biggest hedge funds with a large stake in the company is Joseph Edelman’s Perceptive Advisors’ which had $66 million invested in the stock at the end of September. CHRS is one of the leading biosimilar companies globally. Shanghai Junshi Biosciences Co., Ltd recently announced that they intend to make a $50 million strategic investment in CHRS in accordance with the terms of the definitive stock purchase agreement.

6. Covertus, Inc. (NASDAQ:CVET)

No of HFs: 24

Total Value of HF Holdings: $246 Million

Michael Doheny’s Freshford Capital Management is one of the top hedge funds having positions in the stock which had $107 million invested at the end of September. An insider recently purchased 1,648 shares at around $14 in August 2019. The stock is up 157% since then. Silver Ring Value Partners mentioned CVET in its Q4 2020 investor letter:

“Business Vision in 5 Years: The distribution business continues to grow at a moderate clip. The company’s Vets First Choice SaaS business both adds a substantial number of new vet practices and meaningfully increases the revenue per practice in the U.S. The company develops a growing business in Europe which is several years behind the U.S. in its maturity. These developments lead to an explosion in profits as the relatively high contribution profit margins from the SaaS business make Vets First Choice the more profitable of the two divisions.

What Can Prevent It From Getting There:

-Market structure changes so that vets give up on selling drugs to consumers, cede that business to others like Chewy’s, and increase prices for their services to maintain practice profitability

-Consolidating suppliers squeeze the economics out of the distribution business

-Vets prove more resistant to adopting Vets First Choice software and the majority never reach the revenue potential that it offers.”

Click to continue reading and see 5 Best Small-Cap Healthcare Stocks to Buy.

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Disclosure: None. 15 Best Small Cap Healthcare Stocks To Buy Now is originally published at Insider Monkey.