You may not have heard of hedge fund manager Michael Masters- but he has gone from unemployed stockbroker to the founder and managing member of the now-$4 billion Masters Capital Management fund. So when he makes a significant stock move, it’s worth tracking. In the second quarter, SEC forms reveal that Masters made two key trades on exploding Transenterix Inc (NYSEAMERICAN:TRXC) and Gilead Sciences, Inc. (NASDAQ:GILD). But before we take a closer look at these 2 stocks, let’s first explore Masters strategy to success.
After five years as a broker, Masters reached peak frustration. He decided to start his own hedge fund. In order to raise start-up capital he sold ten 1-percent shares in his new company at just $7,000 per share. This has been a great deal for those initial investors as the fund has achieved an average annual compounded return of 86%, with only three losing months. And his colleagues speak of Masters’ dedication and focus- he is known to lock himself in the trading room and refuses to accept phone calls during trading hours. When asked why Masters, nicknamed ‘big sloppy’ because of his height, is so impressive, one colleague says: “First, his integrity; second, his morality; and third, his determination to succeed.”
Masters himself has been open about his advice for stock market investors. Boiling down his approach into four main points results in the following: learn from experience, develop your trading philosophy, define high probability trades and have a plan. This includes a plan for liquidating trades- which for Masters can be when a catalyst has not materialized or the profit goal has been achieved. In fact, looking for catalysts is key to Masters whole strategy. He says “our whole focus is looking for catalysts. It’s not just part of our strategy; it is our strategy.” He then uses time stops to make a decision: “For every trade I put on, 1 have a time window within which the trade should work, if something doesn’t happen within the time stop, the market is probably not going to discount that event.”
But Masters doesn’t just spend all his time running the hedge fund. He is also a passionate advocate of financial reform for unregulated commodities speculation and has been called as an expert before many Congressional committees and government agencies. In fact, he has even made numerous media appearances to further his cause, and founded the Better Markets organization. This is a Washington based nonprofit, nonbiased group established to promote market transparency and accountability for the public interest. His philanthropic nature also extends to several charities- leading Masters to be named the 2004 winner of the “Open Your Heart” award from Hedge Funds Care.
Now let’s delve into two specific biotech trades:
In the second quarter, Masters went all out with his move on Transentrix. He ramped up the fund’s holding of this surgical robot maker by 111% with the purchase of 2,101,175 shares. Now the fund has a total position in the stock of 4,000,000 shares valued at $2,840,000.
And it would appear that Masters made the right decision. TRXC shares are exploding by over 100% to over $3 after a crucial approval from the US Food and Drug Administration (FDA). The FDA gave the thumbs to the company’s surgery-assisting robot far earlier than expected. The Senhance Surgical Robotic System, which is designed to assist with colorectal and gynecology procedures, was only expected to receive approval at the end of the year.
Five-star Stifel Nicolaus analyst Rick Wise has been analyzing the latest advance for TRXC. He notes that this is the “the first FDA surgical robotic system approval in two decades,” and is now looking forward to a robot launch at the “very large and influential” American College of Surgeons (ACS) conference on October 22. He has a buy rating on the stock and a $3.75 price target which suggests TRXC has marginal 1.6% upside from the current price. (To watch Wise’s track record, click here)
However, Masters may have to wait a while for TRXC to truly realize its market potential. Wise says that “much work still needs to be done to build commercial scale” including additional indication and technological approvals over the next several years. Further work will involve establishing relationships with hospitals and surgeons; meeting hospital purchasing committees and a lengthy capital purchasing cycle. The same will also be needed if the company is to drive its robot products outside of the US, for example, in Europe. Ultimately however “a large commercial robotic opportunity” is on top says Wise- especially if the firm expands into more general surgery options. This is especially promising when you consider that 4 million open abdominal procedures occur each year in the US and the EU.
This is one of only 2 stock ratings TRXC has received in the last three months. Interestingly the other stock rating is a hold without a price target from BTIG’s Sean Lavin. Although Lavin agrees that “this is a major milestone for the company” ultimately, he is nervous about the competition still posed by Intuitive Surgical. TRXC “still has commercial hurdles as it attempts to compete” he concludes.
Masters gave up on controversial biopharma giant Gilead Sciences in the second quarter. The fund exited the stock completely with the sale of 500,000 shares worth $35,390,000 (at $70.78 per share).
The catalyst this time was- as with Transenterix- an FDA approval for Gilead’s lymphoma therapy drug. The drug, Yescarta, which finds and targets cancerous cells, will have a list price of $373,000. EvaluatePharma, a research firm, projects $1.7 billion in world-wide sales in five years.
Gilead CEO John Milligan called it an “important day” for advanced lymphoma patients because currently their treatment options are so limited. Encouragingly, he believes that the advancement of cell therapy research, which led to Yescarta, will lead to the discovery of further treatments for other types of cancer.
Furthermore, the approval seems to validate Gilead’s $11 billion purchase of Kite Pharma earlier this year. Yescarta is the result of Kite’s flagship cell-therapy treatment- known as Cat-T treatment- which uses genetically engineered T cells. The only other approved drug so far which uses their technology comes from Novartis and is even more expensive at $475,000.
We can see from TipRanks that overall Gilead has a cautiously positive Moderate Buy analyst consensus rating. In the last three months, the stock has received 10 buy ratings but also 7 hold ratings. The average price target from all these analysts comes out at $88.57- 10.5% upside from the current share price.