From Bill Ackman down, hedge-fund managers piled into Valeant Pharmaceuticals International Inc. like no other stock in North America. After its stunning fall, the question now is who’s left to buy.
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. But as its stock has plummeted 70 percent since August over questions about its business model, the high concentration of big-name stockholders has suddenly become a liability.
“This was a crowded name with some very bad headlines, so when you get a little hair on it, it just reacted so viciously,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “I doubt you’re going to see other hedge fund guys want to own this thing. It’s toxic at this point.”
With the second highest hedge-fund ownership of any company in America behind Allergan Plc, there’s been plenty of pain to go around. Twenty-two different institutional investors, including Ackman’s Pershing Square Capital Management and Paulson& Co., owned a stake greater than 1 percent of Valeant at the end of June -- higher than 90 percent of the Standard & Poor’s 500 Index.
Combined, they have lost a $40 billion in just three months. It’s those losses that have started to raise thorny questions about who might be in a position to buy. Valeant, which added $88 billion in value since 2009, has given up $62 billion of that since August. Among the 32 institutional investors that had Valeant in their top 10 holdings at the end of June, the average stake equaled about 10 percent of assets.
“As soon as the stock goes down these guys that were your best friends become your stock’s worst enemy,” said Howard Ward, who oversees $42.7 billion as the chief investment officer of growth equities at Mario Gabelli’s Gamco Investors Inc. Ward doesn’t own shares in Valeant. “There is a certain herd mentality and the element that worked on the way up hurts on the way down.”
Down was the direction Thursday. About $4.5 billion was erased from Valeant’s market value as the stock slumped as much as 20 percent, the sixth time in six weeks it has lost more than 10 percent in a day.
To be sure, stocks have come back from worse. Almost five times as much market value was erased from Apple Inc. as it plunged 44 percent between September 2012 and April 2013. It has since recovered to become the world’s biggest publicly traded company. The S&P 500 itself gave up 57 percent over 17 months during the financial crisis and made it all back in four years.
If you build an investment case on the basis of nothing but forecast earnings, Valeant’s plunge has made it a screaming buy. Using 2016 estimates, the shares trade for less than 6 times adjusted earnings and a price-to-cash flow ratio of 4.8. The comparable multiples in the S&P 500 are 16.2 and 11.2, while for health-care companies they’re 15.8 and 13, data compiled by Bloomberg show.
Math like that may have convinced Ackman to double down on the shares and predict it will hit $448 by 2019. The Pershing Square founder bought 2 million more shares of Valeant in the midst of a 40 percent tumble on Oct. 21, adding to a stake that is already Valeant’s third-largest. The stock has lost 34 percent since.