A Bunch of Hedge Funds Got Burned by Valeant
Comment of the Day

November 06 2015

Commentary by David Fuller

A Bunch of Hedge Funds Got Burned by Valeant

Here is the last section of this topical article from Bloomberg:

Some of the stock’s largest investors are known for their value-investor leanings, including the biggest owner: New York-basedRuaneCunniff & Goldfarb Inc., which traces its lineage to an early acolyte of Warren Buffett. A firm run by Wally Weitz, a value investor from Buffett’s home town of Omaha, Nebraska, said on Nov. 2 that it exited its remaining investment.

Another value legend, Glenn Greenberg of Brave Warrior Advisors LLC, said in a Bloomberg News interview this week that he’d add to his stake today if it weren’t already so big. Greenberg defended the stock, saying its decline was the result of lazy media coverage of a short seller’s false claims.

It doesn’t help that Charles Munger, Buffett’s longtime business partner, in a Saturday interview with Bloomberg called Valeant’s practice of acquiring rights to treatments and boosting prices legal, but “deeply immoral,” and “similar to the worst abuses in for-profit education.”

Barry Rosenstein’s Jana Partners on said this week it sold its stake in the company after politicians including Hillary Clinton called into question drug pricing practices.

The company is also the focus of two congressional probes seeking to examine why Valeant and Turing Pharmaceuticals AG raised prices of medications sharply after acquiring them.

“I’ve seen a lot of broken growth stocks, that’s not what happened here,” said Michael Sansoterra, a money manager RidgeWorth Capital Management in Atlanta, where he oversees $1.9 billion. “This is not a value stock. This is a stock that’s in no man’s land.”

David Fuller's view

I post this article not for schaudenfreuda – an understandable but unworthy trait – but because every one of us can learn from it.   

Note Glen Greenberg’s comment that “he’d add to his stake today if it weren’t already so big”.  I know the feeling.  Which one of us has not experienced money control problems, not least with leveraged positions?

See also the opening of the second paragraph (not shown above): “Valeant, in many ways was designed for hedge funds.  Cobbled together by veterans of Goldman Sachs Group Inc. and McKinsey & Co., the drugmaker borrowed heavily to buy everything in sight and raised earnings almost 20 percent a year.”  

Clever, perhaps, but I think Charlie Munger has the right perspective on this: in a Saturday interview with Bloomberg [he] called Valeant’s practice of acquiring rights to treatments and boosting prices legal, but “deeply immoral,” and “similar to the worst abuses in for-profit education.”

Valeant was also a stock market momentum move, no doubt including a number of investors who did not know that it was called ‘hedge fund hotel’, but just bought it because of the strong reported earnings and relative strength.  In that situation, how many of the warning signs might you have identified?

Note the following: 1) increasingly overextended relative to the MA, and considerably more so than at the beginning of 2014; 2) a weekly key reversal at the very high, albeit a small one; 3) downside follow through which would have triggered most trailing stops which you might have considered putting in during the obvious overextension; 4) these would have presumably been triggered on the way to 200 but you might have been sucked back in by the recovery which followed; 5) if so, it still would have made sense to place another stop at 200 or slightly below that level; 6) the next downward dynamic was huge, leaving behind a clear top formation.  

So, should we now be looking for a buy signal?  You could, but if you agree with Charlie Munger, would you want to own Valeant?  

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