Valeant Hits Another Big Hedge Fund
We talked about Bill Ackman’s Pershing Square and its terribly bad quarter in a previous post. The list of hedge funds which have been burned by Valeant Pharmaceuticals is, however, much longer. Valeant was also instrumental in crippling the returns of Lone Pine Capital’s hedge funds.
Also see a great curated list of hedge fund letters
Lone Pine’s Cypress suffered a net loss of 8%, whereas Lone Kauri, Lone Tamarack and Lone Cascade were down 7.9%, 7.1% and 4.5%, respectively. Lone Cascade is a long-only investment vehicle. Last year Lone Cypress was up 8.7%, a gain which has been wiped out by the losses incurred in the first quarter of this year, according to a letter to investors reviewed by ValueWalk.
Lone Pine gets hit in its long portfolio
According to 13F filings, Lone Pine Capital held 5.8 million shares of Valeant through the end of last year. Other hedge funds which took a hit from Valeant’s troubles include Paulson & Co., Viking Global Investors, Jana Partners and Coatue Management. It is highly likely that some of these funds unloaded their Valeant burden in the last quarter.
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The Energy sector has also humbled many bigwigs of the hedge fund industry. We mentioned the under-performance of Carlson Capital’s Black Diamond Energy Fund. The Energy sector’s consolidation was hurt when it was thrown into a frenzy by a multitude of factors. Rumors of Chesapeake Energy’s bankruptcy, the uncovering of shorts which caused a significant short squeeze in the Energy sector, and confusion around Energy Transfer Equity’d merger with Williams Companies fueled the volatility.
Lone Pine held 28.9 million shares of Williams Companies at the end of 2015. The fund has mentioned its bullish view on the Energy Transfer and Williams merger, however, this was one of the fund’s underperforming longs in the first quarter. Williams’ stock is down 23% YTD as fresh tax issues make the ETE/WMB merger more difficult.
Tech sector is undervalued
Some of the largest stakes held by the hedge fund are in web-based companies. The managers believe these internet giants have tremendous worth and are undervalued at current prices. The firm’s management commented in their letter that the market has not priced in the entrepreneurial value of these companies and discounts their cash-generating ability as well. The major tiger cubs follow a consistent investment style, as funds like Blue Ridge Capital, Viking Global and Coatue Management have large investments in the technology sector.
Lone Pine’s short bets in consumer sectors
Lone Pine has done well in the short portfolio it holds in Europe. The fund looks to short companies that are negatively affected by the technology boom. One of Lone Pine’s bearish bets is Next. The position turned profitable as the stock slumped towards the end of March, shedding 26% in Q1. Marks and Spencer Group’s shares were down 10%, benefiting Lone Pine’s 0.9% short position in the company.
One short bet in the clothing industry was not as profitable. Burberry Group gained 14% in the first quarter, hurting Lone Pine’s 1.7% position. Tesco, where the tiger cub has a 1.26% short, has been up 28% in the past quarter. Tesco has a food retail and retail banking business. In order to manage risk, Lone Pine is reducing gross exposure in its portfolio, said the Q1 letter.
Lone Pine Capital management thinks companies like Shire, Charter Communications and Dollar Tree have the ability to enhance their own value as they acquire businesses they can turnaround. For example, Shire is close to buying U.S.-based specialty drug company Baxalta in a $32 billion deal. Similarly, Charter Communications has moved to buy Time Warner Cable and Bright Circuits Network.
Lone Pine’s letter also said that the wave of electronic payment systems is going to benefit its positions in PayPal, Fleetcor and other similar companies.
Equity market is better investment than fixed income
The quarterly letter comments on the “anti-business” policies that are being discussed in political circles as well. It is possible that Lone Pine is referring to the stricter tax regulations that are creating difficulties for M&A activity across industries. The fund managers also think that with the lower interest rates, fixed income investments don’t seem attractive and holding equities is the only investible option.
The managers also spread some hope around in the quarterly letter, saying that fast access to information and news makes it appear as if only bad things are happening. However, the quality of life for an average person has improved, so conditions are not as bad.
The quarterly letter also announced the appointment of a new equity analyst, Joan Payson, who will join Lone Pine’s team to analyze investments in the consumer sector.
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[Top Photo Credit: Beximco Pharma, Flickr]
