The Morning Brief: Investors Trash Valeant’s Stock

March 01, 2017   Stephen Taub


Some hedge funds are still big investors in the troubled drug company, which took a hit after it reported that revenues fell by double digits.

So much for the Valeant Pharmaceuticals revival. Tuesday was a huge setback for the hedge fund honchos who have been counting on 2017 being a big bounce-back year for the embattled drug maker. Shares of Valeant plunged 14 percent, to $14.36, on Tuesday even though the company reported fourth-quarter earnings that beat forecasts. Investors, however, focused on the fact that revenues fell 13 percent. The stock is now down for the year.

In addition, Barron’s reported that Wells Fargo published a note to clients asserting that "Valeant’s franchises all appear to be stagnating or in decline and cash generation continues to deteriorate." As we earlier reported, in the fourth quarter John Paulson’s Paulson and Co. remained the largest investor, adding 513,500 shares and bringing its total to nearly 19.4 million. Bill Ackman’s Pershing Square Capital Management, the second-largest shareholder, pared its stake by 16 percent, or nearly 3.5 million shares, to a little more than 18.1 million shares. Jeff Ubben’s ValueAct Capital remained the third largest shareholder.

Several other high-profile hedge funds, however, bailed out of the stock altogether in the December period, including PointState Capital, which sold all of its roughly 8.5 million shares. There also were virtually no hedge funds that stepped up and took big bottom-fishing stakes.

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Hedge fund investors are apparently a happy bunch these days. According to Credit Suisse’s ninth annual survey, 87 percent said they would maintain or increase their hedge fund exposures this year. This is exactly the same percentage as last year. So, it is not surprising Credit Suisse is forecasting a 3.5 percent increase in new inflows this year. This commitment is especially encouraging for hedge fund firms given that just 30 percent of investors said their hedge fund portfolios had met or exceeded their expectations in 2016, according to the survey of over 320 institutional investors representing $1.3 trillion of hedge fund investments. This was down sharply from 45 percent in last year’s survey.

Still, investors remain optimistic. They are aiming for 7.2 percent annual returns in their hedge fund portfolios in 2017, which is way above the industry’s average return of 5.5 percent last year, according to the 69-page report. One possible reason investors seem pretty content: They are apparently improving the terms of their deals with funds. According to the survey, a shocking 61 percent reported at least one manager within their portfolio has a hurdle rate. In addition, 57 percent said their management fees were lowered in the past 12 months. Drilling down, investors reported they most prefer global macro-discretionary funds, followed by fixed income arbitrage/relative value.

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Shares of hedge fund favorite The Priceline Group surged 5.6 percent, to $1,724.13, after the online travel agency reported fourth-quarter revenues and earnings that beat expectations. In the fourth quarter, gross profit grew 21 percent, while gross travel bookings surged 26 percent. In a note to clients, Credit Suisse raised its estimates and its target price from $1,900 to $1,935, stressing that "accelerating growth underscores strong execution and leadership position."

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Elliott Associates, the hedge fund managed by Paul Singer’s Elliott Management Corp., lifted its stake in Arconic to 13.3 percent. Elliott, a multistrategy firm that often engages in activism, recently nominated five individuals to the board of directors of the aerospace and automotive parts maker.


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