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Invest long enough and often enough, and you’ll eventually screw up on either price or timing. No one is immune: Warren Buffett bought Dexter Shoe Co. and US Airways; Carl Icahn bought Blockbuster and WCI Communities. All investors have a forehead-slapping moment.
Is Bill Ackman, founder and CEO of hedge fund giant Pershing Square Capital Management, having one of these moments? From the outside looking in, the answer appears “yes,” though Ackman thinks otherwise.
Valeant Pharmaceuticals International (NYSE: VRX) is Pershing Square’s largest holding. Pershing’s latest 13F filing, for the period ended June 30, shows that it owns 19.47 million Valeant shares valued at $4.3 billion. Pershing’s estimated cost basis is $177 per share. The pharmaceutical stock accounted for 30% of the market value of Pershing’s long portfolio. You can say this about Ackman: he goes big or he goes home.
As recently as August, all seemed well and good for Pershing. Valeant shares were trading above $260 each. Unfortunately, August was the apex. Valeant shares subsequently drifted lower – much lower.
In September, Valeant shares drifted down to $160 from $240. They rallied to $180 in early October. But then the rug was pulled out this week on a blistering anti-Valeant report delivered by an obscure research firm, Citron Research.
As I write, Valeant shares trade below $100. Citron says that $50 is more like it.
I’m actually familiar with Citron Research and its modus. Citron is really a short-selling enterprise. It shorts a stock and then releases research to back the short. The goal is obvious: Convince other investors to sell or short-sell the target. The research serves as the motivator.
Citron’s research is hardly unbiased, but bias doesn’t negate insight. Citron alleges that Valeant is using a network of specialty mail-order pharmacies that it controls to prop up sales of its high-priced drugs. Citron’s language is unequivocal. According to Citron, these companies are used by Valeant to create invoices to deceive auditors and to book revenue. Citron goes on to call Valeant a “pharmaceutical Enron.”
Depending on when you pull up Valeant’s share price (it’s quite volatile these days), Pershing’s investment has lost as much as half its value. Ackman appears to have gotten Valeant wrong on both price and time, but not if you ask him. His response to the price drop was to pick up an additional 2 million shares.
I generally like Ackman’s investing approach. He takes large positions in a few stocks. Pershing’s long portfolio consists of only seven stocks, of which Valeant is (or was) the largest position by market value. If you want big returns, you need to concentrate your efforts. Ackman is willing to concentrate his efforts. That said, a concentrated portfolio is also a volatile portfolio, though it can also be very profitable portfolio. (Especially when they’re the kind of stocks you can hold forever). Ackman’s track record proves as much.
I also like Ackman’s willingness to double down. If he has conviction in his investment, he’ll buy more shares on a price drop. This strategy comes strapped to an obvious risk: If your analysis is wrong, you’re simply compounding an error and doubling up on the head slap.
Doubling down on a company accused of fraud that’s still trading at 54 times earnings after a punishing sell-off could be a case of obstinacy triumphing over analysis. Ackman just might be setting himself up for a head-slap moment. After all, no one is immune.