Are Hedge Funds Losing Interest in Valeant Pharmaceuticals Intl Inc (VRX)?

The majority of people around the globe does not known what a stock means, how equity markets work and what their benefits are. Unfortunately, this is a true fact. Of course, people can live their lives happily without ever buying a stock or even without knowing what a stock market is. However, those individuals overlooking equity markets do not fully perceive the potential benefits of investing, as well as the rewards associated with this practice. Small scale investors could start their own investment journeys by channeling some cash into mutual funds, which usually give investors access to diversified portfolios of equities, bonds and other investment securities. However, only 1 % of large-cap mutual fund managers posted gains in the first two months of 2016, so passive management is not entirely great amid a “slow-growth” environment. Interestingly enough, Wall Street analysts and investors believe that 2016 will offer a great environment for active managers, also known as stock pickers. But how can individual investors pick potential winning stocks? The basket of stocks that received the most attention from hedge funds in the fourth quarter of 2015 is one way to identify potential winners. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX).

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was in 83 hedge funds’ portfolios at the end of December. VRX has seen a decrease in hedge fund sentiment recently. There were 88 hedge funds in our database with VRX positions at the end of the previous quarter. At the end of this article we will also compare VRX to other stocks, including Northrop Grumman Corporation (NYSE:NOC), The Blackstone Group L.P. (NYSE:BX), and Travelers Companies Inc (NYSE:TRV) to get a better sense of its popularity.

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It’s already widely known that Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) had a terrible 2015, but billionaire Bill Ackman of Pershing Square Capital Management L.P. continues to be one of the most outspoken supporters of the company. It should be noted that Pershing Square endured its “greatest peak-to-through decline and worst annual performance ever” in 2015, mainly owning to the disastrous performance of the specialty pharmaceutical and medical device company. Valeant’s shares are down by 67% over the past 52 weeks, due to a combination of increased political attention on drug pricing, regulatory scrutiny, criticism and attacks from short sellers, and the termination of the highly-scrutinized distribution arrangement with Philidor. In its third-quarter letter to investors, the billionaire activist investor said:

“When Valeant’s specialty pharmacy (Philidor) and drug pricing controversies came to light, we assessed the impact of these developments on future revenues, earnings and cash flows. While we believe that 2016 cash earnings will likely be somewhat lower than our initial estimate, we do not believe that Valeant’s long-term earnings prospects have materially changed. While there remains uncertainty with respect to Valeant’s business, we believe the company’s business value has grown considerably since our initial investment despite recent negative developments, unfavorable press, some reputational damage, and short-term disruption to the company’s distribution of dermatology products.”

More importantly, Bill Ackman has stuck with the company through both good and bad times, and recently said that “We expect much of the uncertainty will be resolved in the relative short term, hopefully over the next few or so weeks, when we expect the company to issue results, update guidance, and file its 10-K”.

With all of this in mind, let’s analyze the new action surrounding Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and also discuss what a former shareholder of the company had to say about this stock.

Let’s now take a quick look at what Barry Rosenstein of JANA Partners had to say about his firm’s investment in Valeant Pharmaceuticals Intl Inc. (NYSE:VRX). In its third-quarter letter to investors, JANA Partners said that the firm initiated a position in the struggling company in the fourth quarter of 2014 and closed out its entire position in September 2015, claiming that “When the facts do change, we react”. To be more detailed, the letter said the following:

“The situation for Valeant changed dramatically in September, when its drug pricing practices were called into question by Hillary Clinton. Valeant had been under scrutiny for months, and in retrospect we should have been more acutely attuned to the importance of the inquiry into the price increases or certain of Valeant’s drugs by Senator Sanders and Representative Cummings that surfaced in August. We had reduced our Valeant position meaningfully earlier in the spring and summer as it approached our price target, and we felt more comfortable with our smaller position. When Valeant’s business practices were conflated with those or Turing, whose founder painted himself and his company (and by extension Valeant) as a nearly perfect political target, we recognized that Valeant’s business model would be forced to change in ways we could neither anticipate nor forecast and decided to exit completely, thereby avoiding an approximate 40% further drawdown in the stock”.

How have hedgies been trading Valeant Pharmaceuticals Intl Inc (NYSE:VRX)?

At Q4’s end, a total of 83 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decline of 6% from the previous quarter. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Pershing Square holds the most valuable position in Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Pershing Square has a $1.69 billion position in the stock, comprising 13.5% of its 13F portfolio. Sitting at the No. 2 spot is ValueAct Capital, managed by Jeffrey Ubben, which holds a $1.52 billion position; 10.6% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors with similar optimism consist of John Paulson’s Paulson & Co, Peter Adam Hochfelder’s Brahman Capital and Andreas Halvorsen’s Viking Global.

Due to the fact that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has experienced falling interest from the aggregate hedge fund industry, we can see that there lies a certain “tier” of funds that slashed their full holdings by the end of the third quarter. It’s worth mentioning that Marc Lisker, Glenn Fuhrman and John Phelan’s MSDC Management said goodbye to the biggest position of all the hedgies tracked by Insider Monkey, valued at about $217.2 million in stock, and Jacob Gottlieb’s Visium Asset Management was right behind this move, as the fund said goodbye to about $184.1 million worth of shares. These transactions are interesting, as aggregate hedge fund interest was cut by 5 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Valeant Pharmaceuticals Intl Inc (NYSE:VRX). These stocks are Northrop Grumman Corporation (NYSE:NOC), The Blackstone Group L.P. (NYSE:BX), Travelers Companies Inc (NYSE:TRV), and General Mills, Inc. (NYSE:GIS). This group of stocks’ market values are closest to VRX’s market value.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $882 million. That figure was $12.56 billion in VRX’s case. Northrop Grumman Corporation (NYSE:NOC) is the most popular stock in this table, while Travelers Companies Inc (NYSE:TRV) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio, since many top investors are still bullish on the stock, despite its abysmal performance.

Disclosure: None