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Alger Small Cap Focus Fund: “We Continue to Have High Conviction in Guardant Health (GH)”

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Alger, an investment management firm, published its “Alger Small Cap Focus Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. During the quarter, the largest portfolio sector weightings were Health Care and Information Technology. The largest sector overweight was Health Care. Class A shares of the Alger Small Cap Focus Fund outperformed the Russell 2000 Growth Index during the second quarter of 2021. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Alger Small Cap Focus Fund, the fund mentioned Guardant Health, Inc. (NASDAQ: GH), and discussed its stance on the firm. Guardant Health, Inc. is a Redwood City, California-based precision oncology company, that currently has a $10.3 billion market capitalization. GH delivered a -20.76% return since the beginning of the year, while its 12-month returns are up by 14.21%. The stock closed at $103.93 per share on August 11, 2021.

Here is what Alger Small Cap Focus Fund has to say about Guardant Health, Inc. in its Q2 2021 investor letter:

"Guardant Health is a pioneer in liquid biopsy testing. The company established itself as a leader in the large and underpenetrated blood-based oncology testing market with its comprehensive genomic profiling test, Guardant360. Guardant Health has also leveraged its extensive research and development as well as its commercial infrastructure to develop and sell additional tests. In February, the company launched its minimal residual disease/recurrence monitoring test, Guardant Reveal. The company also plans to launch a blood-based early cancer detection test, called LUNAR -2. Notably, these tests could potentially address a total market that exceeds $50 billion and that is only the U.S.

We believe Guardant Health's underperformance in the second quarter resulted from two factors. First, the company generated solid but unexciting results for the first quarter, which included only modestly beating expectations and only reiterating its fullyear guidance. Given the company's premium valuation, the results were not strong enough to support Guardant's share price. Second, Guardant Health outperformed high growth Tools & Diagnostics companies in the first quarter and there was likely a mean reversion dynamic at play in the most recent quarter.

We continue to have high conviction in Guardant Health with the company positioned to potentially benefit from multiple trial updates, including for Guardant Reveal and LUNAR-2, and several reimbursement decisions. We believe the company is also positioned to build additional momentum in its core business with the decline of Covid-19 cases in the U.S."

Medical Schools with Highest Acceptance Rates in America
Medical Schools with Highest Acceptance Rates in America

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Based on our calculations, Guardant Health, Inc. (NASDAQ: GH) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GH was in 41 hedge fund portfolios at the end of the first quarter of 2021, compared to 52 funds in the fourth quarter of 2020. Guardant Health, Inc. (NASDAQ: GH) delivered a -6.52% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.