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During the second quarter, Francis Chou (Trades, Portfolio) of Chou Associates Management added 48.11% and 38.77% to its positions in Valeant Pharmaceuticals International Inc. (VRX, Financial) and Sears Holdings Corp. (SHLD, Financial). As the stock prices continue to decline, the companies offer investing opportunities. The above transactions align with Chou’s strategy of investing in companies with depressed prices.
Established in 1986, the Chou Associates Fund seeks long-term capital growth by investing in undervalued U.S. and Canadian securities. As mentioned in its recent prospectus, the fund analyzes the company’s balance sheet and common financial metrics: profitability, growth potential and intrinsic value. While the manager has a limited number of positions, Chou reduces the portfolio risk by investing in companies with high margins of safety.
Valeant Pharmaceuticals
Chou added 470,000 shares of Valeant Pharmaceuticals at an average price of $28.31 per share, increasing his stake in the Canadian drug manufacturing company to 1,446,843 shares. The company represents 11.33% of Chou’s portfolio.
Even though it has a financial strength rating of just 3, Valeant Pharmaceuticals has a profitability rank of 7, suggesting high growth potential. Valeant currently has a three-year revenue growth and a three-year EBITDA growth that outperform 95% of global drug manufacturing companies. Additionally, the company has a Greenblatt return on capital of 30.29% and a Yacktman forward rate of return of 73.97%, the latter outperforming 98% of global drug manufacturers.
While Valeant had increasing returns during the past five years, the company’s stock price dramatically decreased during the second half of 2015. In its recent 10-Q filing with the Securities and Exchange Commission, the management of Valeant described likely reasons for the sharp decline in stock price. The company realized net losses of $676 million in the first half of the year, likely due to poor contributions and impairment write-downs of the company’s intangible assets. Additionally, Valeant terminated its relationship with Philidor Rx Services LLC, which likely dropped net sales.
Due to the sharp decrease in stock price, Valeant is likely undervalued based on its projected free cash flow and median price-to-sales value. Additionally, the company is slightly undervalued based on its Peter Lynch chart.
Ruane Cunniff (Trades, Portfolio) and Bill Ackman (Trades, Portfolio) currently have the largest positions in Valeant, with 30.31 million shares and 21.59 million shares.
Sears Holdings
After adding 400,000 shares at an average price of $14.12, Chou currently owns 1,097,910 shares of Sears.
While the stock price increased from 2009 to early 2011, Sears generally had decreasing stock prices since 2008. In its recent SEC quarterly report, Sears’ management discussed likely reasons: net losses and contracting margins. Despite the net losses, the specialty retail company still has potential to increase value. Excluding the rent from Sentage and three joint ventures, Sears’ adjusted EBITDA for the 13 weeks ended April 30 slightly outperformed the adjusted EBITDA for the 13 weeks ended May 2, 2015. Additionally, the company’s three-year earnings per share (EPS) growth outperforms 64% of global department stores companies.
Fairholme Fund (Trades, Portfolio) Director Bruce Berkowitz (Trades, Portfolio) owns 27,863,548 shares of Sears as of June 30. Throughout the past five years, Berkowitz continued increasing his stake in the specialty retail company. In his semiannual letter, the director discussed his company’s potential to restore profitability: Sears can increase operating performance through a more integrated retail system. For example, Sears’ logistics service efficiently distributes the company’s products across different regions and warehouses.
See also
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Disclosure: The author has no position in the stocks mentioned in this article.
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