Healthcare is our exclusive area of expertise. Accordingly, we possess multiple advantages that allow us to generate returns for our investors.
The healthcare industry is comprised of many distinct subsectors which have low cross-correlation. This variation allows Sio to achieve diverse, uncorrelated investments. Concurrently, by specializing in healthcare, we are focused enough to recognize and comprehend the many complex issues that lead to market inefficiencies and investment opportunities.
Our comprehensive coverage of healthcare is a further benefit in that our research in one area, inevitably gives us insight into other areas of the healthcare industry. For example, managed care organizations report their observations about hospital admission trends which help us forecast hospital revenues. Similarly, analyzing a generic drug manufacturer in India might give us insight into potential competition for a branded drug company in the US. This is mosaic theory in action for us. Even if we pass on making an investment in one company, the knowledge we acquire may help us invest across our portfolio.
Global investing creates the ability to diversify geographically and is particularly advantageous for identification of international companies that have not yet garnered much US-investor attention but are nonetheless, great investment opportunities. This is especially true for mid-cap companies < $5B market cap.
At Sio, we use our own, unique research models for evaluating companies and making investment decisions. Of their many benefits, is an assurance of consistency within Sio, as well as the ability to interpret the latest information quickly and independently.
Our proprietary quantitative model, “Qbert,” identifies stocks with quantitative characteristics that have been shown to be predictors of future outperformance (or underperformance). Qbert serves as a screening tool. It helps us focus our research efforts and generates new ideas. Along with Qbert, other proprietary tools that help us monitor active and potential investments include our Dividend Discount Model (DDM), analyst comp sheet, and price target lists.
Team members make use of each other’s knowledge, insights and critical-thinking skills. We collaborate on projects and have peer reviews of models. Drawing on the expertise of our colleagues helps us eliminate errors and hone our judgment on key issues.
Behavioral biases can cause investors to sell a stock, regardless of price, when there is a high degree of near-term uncertainty about a particular company even though its long-term prospects may be solid. In our effort to generate returns, we try to retain a dispassionate analytical approach to assessing valuation. We consider sentiment, near-term catalysts and long-term earnings power when considering investment opportunities.
Some of Sio’s research professionals have backgrounds in science, engineering and statistics. Understanding clinical trials and assessing products in development can be indispensable when it comes to evaluating certain healthcare stocks. We believe that it is important to be skeptical when evaluating products in development. Failure is more common than success and companies often ‘spin’ their data to make it seem as favorable as possible.
Patent challenges are a common issue faced by most pharmaceutical companies and medical technology manufacturers. Sio’s research professionals have developed an aptitude for assessing patents and legal challenges. Additionally, we augment our own evaluations with the aid of legal consultants.
Surprisingly, readily-available information is often overlooked or disregarded altogether. Signs of toxicity in drugs, indications of slowing demand, and aggressive accounting are each examples of warning signals that we encounter. Companies sometimes ignore these early warning signals and investors frequently follow suit. We agree with Senator Patrick Moynihan, who wisely stated that, “Everyone is entitled to their own opinions, but they are not entitled to their own facts.”
