Valeant, Morgan Stanley, Genocea: Stocks In The Spotlight For The Wrong Reasons Today

It’s Monday and shareholders of Morgan Stanley (NYSE:MS), Valeant Pharmaceuticals Intl Inc (NYSE:VRX), and Genocea Biosciences Inc (NASDAQ:GNCA) are certainly on alert as the value of their shares has changed substantially since Friday’s close, and not for the better. Let’s take a closer look at the catalysts causing the negative moves on these stocks and what elite investors think of them.

But first, a little about ourselves. We at Insider Monkey monitor hedge fund sentiment. Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds have beaten the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 49% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Morgan Stanley (NYSE:MS) is down by 5.5% after the investment bank reported disappointing third quarter earnings. Earnings missed analysts’ expectations by $0.29 per share while revenues missed estimates by $1.21 billion. CEO James P. Gorman said:

“The volatility in global markets in the third quarter led to a difficult environment, impacting in particular our Fixed Income business and our Asia Merchant Banking business.”

Apparently, the era of cheap debt coming to an end did not help the company’s M&A division nearly enough to offset the trading unit’s decline. Given Goldman Sachs trades at a lower forward P/E than Morgan Stanley and Goldman Sachs’ earnings results were better, it’s hard to get excited about the stock after this latest earnings report.

Genocea Biosciences Inc (NASDAQ:GNCA), a company developing T cell-directed immunotherapies and vaccines, is down by 27% after the company’s universal vaccine candidate against pneumococcus, GEN-004, failed to achieve the primary endpoints in a phase 2a trial. Management will remove GEN-004 from its near-term plans and will instead refocus the company’s resources on the ongoing Phase 2 program for GEN-003, the company’s immunotherapy for genital herpes.

On the next page, we analyze why Valeant is getting beat up some more today.

Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are down by 6.9% after the pharmaceutical giant reported third quarter earnings of $2.74 per share on revenues of $2.79 billion. Although the company beat analysts’ profit expectations, its results apparently underwhelmed nonetheless. Valeant’s stock has been soft since August as investors worry over government probes and potential price regulations. Many in the medical community have criticized Valeant for its ‘buy, cut, and raise’ model of buying pharmaceutical companies, cutting their R&D budgets, and raising drug prices to please shareholders. The model has worked for investors so far, however, as shares of Valeant are still up by 16% year-to-date. If the government does nothing about the price hikes, Valeant is a buy (given the forward P/E of 10.98). However, if the government issues limitations, the company’s prospects are more cloudy.

Hedge funds were bullish on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) in the second quarter. Of the 730 elite funds we track, 98 funds owned $22.02 billion of the company’s shares (representing 29.10% of the float) on June 30, versus 104 funds and $20.11 billion respectively at the end of March. Bill Ackman‘s Pershing Square owns 19.47 million shares, while John Paulson’s Paulson & Co owns 9.0 million shares. Jeffrey Ubben’s ValueAct Capital owns 14.99 million shares.

Disclosure: None