Ruane Cunniff Adds to Valeant Stake, Buys 3 New Stocks

The Sequoia Fund distributor bought more shares as it defended the controversial Valeant Pharmaceuticals in Q4

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Feb 26, 2016
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When controversy erupted over Valeant Pharmaceuticals’ accounting practices last quarter, advisers and investors parted ways over the stock. The Sequoia Fund in particular both suffered large losses due to its outsized position in the company and defended its questioned relationship with a pharmacy, Philidor, and astronomical drug price increases. Last week, Ruane Cunniff, the distributor of the Sequoia Fund, reported that it added more share of Valeant and bought three new stocks during the fourth quarter.

Ruane Cunniff ended the year with 142 positions in its portfolio, valued at $17.6 billion. It has as its top sector health care, which represents 54% of all holdings, followed by financial services at 22% of holdings. The Sequoia Fund in its mid-year letter described its portfolio as containing “market-leading companies that earn high returns on capital, boast strong balance sheets and self-fund their growth.”

“We try to invest alongside motivated and ethical management teams and to identify businesses with many years of growth ahead of them,” the letter said.

Valeant (VRX, Financial)

Valeant shares remain depressed, down 53% year to date, after a short-seller presentation caused them to tumble in October, cutting into gains of prominent managers such as Bill Ackman (Trades, Portfolio), Wallace Weitz (Trades, Portfolio) and Sequoia.

“This has caused an extraordinary level of pain, made worse because the most serious allegation leveled against Valeant – that it set up specialty pharmacies as a way to create fraudulent sales and inflate its reported growth rate – is false,” Valeant said in a memo in October.

Sequoia also called Valeant CEO Michael Pearson “honest and extremely driven,” but added,” One lesson of recent events is that sometimes doing everything to maximize earnings does not create shareholder value.”

Valeant eventually severed its ties with Philidor and on Feb. 22 announced it would have to restate some of its business results related to the specialty pharmacy. Valeant said it would have to remove $58 million in net revenues from 2014 results that shouldn’t have been recognized when certain products were delivered to Philidor. As a result, the company expects to reduce 2014 GAAP EPS by ten cents and increase 2015 GAAP EPS by nine cents.

Valeant Shares closed at $80.79 Friday, nowhere near their 52-week high of $263.81.

Pershing Square’s Bill Ackman (Trades, Portfolio), holder of 9% of Valeant’s outstanding shares, took the collapse as an opportunity to increase his position, adding 14.12 million shares on Feb. 4.

Some investors, such as Wally Weitz of Weitz Investment Management, exited their entire stakes in Valeant in response to the controversy. Weitz, in a WealthTrack interview scheduled for Friday evening, said interactions with management raised red flags about the company early on.

'How do you manage such a far-flung enterprise? You have businesses all over the world,' he quoted Pearson as saying at a dinner, 'It's easy. We just get people to run them that... we tell them, 'Make your numbers or we'll get somebody who will.'"

“That was sort of chilling to me,” Weitz said.

Weitz sold his stake in October when the news about Philidor surfaced at a 300% profit but said, “It’s not our proudest moment.”

In the fourth quarter, Ruane Cunniff increased its Valeant position by 4.28%, buying 1,453,418 shares at an average price of $112. The firm owned 35,375,610 shares in total, or 10.3% of shares outstanding. At 20.5% of their portfolio, Valeant remained Ruane Cunniff’s largest holding.

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Valeant Pharmaceuticals has a market cap of $27.67 billion with a P/E ratio of 53.81 and P/S ratio of 2.80. It also had an annual average earnings growth of 10.5% over the past 10 years.

Match Group Inc. (MTCH, Financial)

Ruane Cunniff also bought 9,485 shares of a new stock, Match Group Inc., in the fourth quarter. The holding was 0.05% of the portfolio.

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Autohome Inc. (ATHM, Financial)

Ruane Cunniff purchased 94,555 shares of Autohome Inc., a 0.02% portfolio weight. The stock’s average price was $34 for the quarter.

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Autohome Inc. has a market cap of $2.75 billion; its shares were traded at around $24.90 with a P/E ratio of 16.27 and P/S ratio of 9.36.

Affiliated Managers Group Inc. (AMG, Financial)

Ruane Cunniff purchased 5,120 shares of Affiliated Managers Group, representing less than 0.01% of the portfolio. The company’s share price for the quarter averaged $172.

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Affiliated Managers Group Inc. was formed in 1993. Affiliated Managers Group Inc. has a market cap of $7.4 billion; its shares were traded around $136.93 with a P/E ratio of 14.29 and P/S ratio of 3.21. Affiliated Managers Group Inc. had an annual average earnings growth of 15.0% over the past 10 years. GuruFocus rated Affiliated Managers Group Inc. the business predictability rank of 3-star.

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