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TheStreet Open House

5 Stocks Hedge Funds Love -- and So Should You

Stocks in this article: GMCVDADTYUMLOW

Covance

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When big pharma companies don't want to do the heavy lifting to develop a new drug, they farm the research out to Covance (CVD). The firm provides a range of drug development and laboratory testing services to clients in the pharma, biotech and agrochem industries, digging out a highly profitable niche in the process.

Hedge funds love this stock right now. In the last quarter alone, funds picked up 2.34 million shares of the firm, building their current stake in the firm to $170 million.

>>5 Toxic Stocks You Should Sell in February

Covance offers some big advantages for its clients. Going with a contracted research firm can save time, money, and logistical costs from being borne by pharma firms themselves, instead spreading the huge cost of research facilities across CVD's more active client base during downtime. As big pharma firms increase their marketing and acquisition search efforts (at the expense of R&D), Covance's services help balance incentives a bit better.

The firm's long-term deals with big drugmakers such as Eli Lilly (LLY) and Sanofi (SAN) give it a big moat vs. other third-party research firms because they keep revenues at home. Scale doesn't hurt either; with bigger and better lab facilities than their next closest competitor, CVD is able to take on contracts that smaller research firms can't.

A spotless balance sheet with a big net cash position is a good signal for management's stewardship abilities in 2013. Momentum has been on fire for CVD in 2013. Investors looking for a relative strength play should follow hedge funds into this name.

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