Barring for a few tech names, there are very large-cap stocks that can match the returns that the stock of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has generated over the past few years. With returns of almost 100% since last year and over 80% in the past five years, Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s bull run doesn’t seem to have an end to it. At a time when other biopharmaceutical companies kept focusing on in-house R&D and organic growth, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) managed to demonstrate that one can also achieve tremendous success in the sector by relying heavily on inorganic growth and making strategic acquisitions at the right time. As we have seen in the past, whenever a company displays such high growth, it attracts money . Which is why it is no surprise that Valeant Pharmaceuticals is one of the most popular stocks among the over 700 hedge funds tracked by Insider Monkey. Though the number of hedge funds that reported owning a stake in the company declined to 98 at the end of June from 104 a quarter earlier, the aggregate value of the stakes that these hedge funds held in the company rose by 10% during the same time to $22.02 billion. Read further to know which hedge funds held large stakes in the company and their outlook for the stock.
We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by over 60 percentage points (118% return vs. S&P 500’s 57.6% gain) over the last 34 months (see more details here).
Follow Andreas Halvorsen's Viking Global
There are several hedge funds that boast of a large ownership in Valeant Pharmaceuticals Intl Inc (NYSE:VRX), however, the most notable among them is billionaire activist investor Bill Ackman‘s Pershing Square. Even though the partnership that Valeant and Pershing Square formed last year to acquire Allergan didn’t end up successful, Pershing Square still went ahead and solidified it this year by acquiring almost 19.48 million shares or 4.9% of all outstanding shares of Valeant during the first quarter. Apart from Pershing Square, other prominent hedge funds that held significant stakes in Valeant included John Paulson’s Paulson & Co and Andreas Halvorsen‘s Viking Global, both of which increased their stake in the company during the second quarter by 14% and 340% to over 4.16 million and 9 million shares, respectively. One can gauge why these hedge fund titans were bullish on the company from the first quarter letter that Mr. Halvorsen sent to Viking Global’s investors, in which he wrote:
“Our biggest winner in the quarter was Valeant, contributing 1.4%. The outperformance in Valeant shares was driven by stronger than expected revenue and earnings guidance for 2015, as well as the announcement of the acquisition of Salix Pharmaceuticals, a leader in the treatment of gastrointestinal disorders. We believe that Salix is a strategically and financially attractive addition to Valeant’s portfolio. Similar to Valeant’s other core business platforms, the gastrointestinal space is characterized by strong organic growth prospects, a relatively favorable reimbursement outlook, and limited competition from larger pharmaceutical companies. We remain excited about Valeant and believe that the long-term earnings power of the company is significantly above consensus estimates. Valeant is among our top 20 holdings.”
While the above mentioned hedge funds were bullish on Valeant, there were also a significant number of funds like Jeffrey Ubben‘s ValueAct Capital and Stephen Mandel’s Lone Pine Capital that trimmed their exposure to Valeant during the second quarter. However, considering the fact that most of these hedge funds had initiated a position in Valeant a long time ago and Valeant’s stock rose over 65% during the first six months of the year, one can assume that this selling was for profit booking purposes.
Right now everything seems to be going in favor of Valeant with most of the analysts that cover the stock being heavily bullish on it and the company continuing to do what it does best – making strategic acquisitions. It recently announced the acquisition of Sprout, a biopharmaceutical company that developed the first FDA approved female libido pill, for $1 billion and Synergetics USA (NASDAQ:SURG), a small company that supplies precision surgical devices, for $6.50 per share in cash. Keeping all these positives in mind and also considering that the stock has run up significantly in the past few years, we think that investors who bought the stock some time ago must hold on to it. However, investors that want to get into it at present levels should only invest a part of their capital right now and wait for a better entry point to invest the rest amount.
Disclosure: None
