Ruane Cunniff & Goldfarb was founded by William Ruane (1925- 2005). Warren Buffett (Trades, Portfolio) always spoke highly of Ruane, both attended the same class by Graham, but the firm is also considered of guru level because of its long-term track record and strong value investing fundamental approach. The firm is best known for its Sequoia Fund Inc., which has trounced the Standard & Poor's 500 since inception in 1970. One thing to keep in mind is that Ruane Cunniff (Trades, Portfolio) focused on the intrinsic value of business, but they are committed to the long term and will buy a stock and hold it even through periods of modest overvaluation. The fund is managed by Robert Goldfarb, 67, and David Poppe, 47.
Recently the firm has been criticized over its giant position in Valeant Pharmaceuticals (VRX, Financial), which takes up 31% of the firm’s portfolio. Valeant recently declined sharply after Citron Research and Bronte Capital both published research material showing possible questionable business practices by the pharmaceutical company.
Both Bill Ackman (Trades, Portfolio), who holds a concentrated position in the stock, and Ruane Cunniff have since come out with respectively presentations and letters confirming their confidence in the firm.
What makes it hard to judge their disposition and true thought process is that both are committed to the stock. They are such large shareholders that moving out of it would likely cause a further collapse. Both firms have been reported to be engaging in frantic field research, speaking to doctors and interviewing ex-insiders.
The controversy over the firm’s position sizing with regard to Valeant has become so great that two of Sequoia’s directors resigned over the matter. It is extremely interesting that Ruane Cunniff is actually increasing its exposure to Valeant during this controversy. For sure they are aware of all allegations and have weighed the possibility of fraud, accounting shenanigans and government-imposed fine. Yet, their conclusion is: buy more.
Not just that, they have also bought Allergan (AGN, Financial), which is a similar type of pharmaceutical platform company as Valeant. Their health care exposure is now a whopping 40%. Allergan sold off sharply in conjunction with Valeant (as its business model is somewhat similar) and the wider biotech sector after Hillary Clinton’s tweet:
"Price gouging like this in the specialty drug market is outrageous."
Hillary’s tweet and the Valeant turmoil has put the brakes on the acquisition strategies of pharmaceutical roll-ups who take on debt, buy up biotechs, cut research and development, sometimes raise drug prices and plug developed pharmaceuticals into a well-oiled sales network. Both have been tremendously successful with this model but because the outlook for the model to continue functioning is bleak and with great uncertainty how to proceed from here the stocks have sold off sharply. Valeant now trades at a forward P/E of 4.65x and Allergan at a forward P/E of 18x which are clearly disconnected from the company’s long-term performance as compared to that of the S&P 500:
If the firm is right and Hillary can’t do much about drug pricing and neither Valeant nor Allergan end up in ruins because of their respective 6x EBITDA debt loads combined with possible fines, it may do incredibly well. If it is wrong it is going to be the butt of jokes for all of 2016 and on the wrong end of every performance list.
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