This morning, hedge fund heavyweight and founder of Pershing Square Bill Ackman is holding a call with investors and the financial press to answer questions about his nearly $2 billion stake in specialty pharmaceuticals company Valeant (VRX). This is not an investor call to discuss risk management of his holding in VRX, but an attempt to dispel what he and his team feel is misinformation about VRX’s business and why the company and its stock are misunderstood. This could backfire on him. Four days ago Valeant tried to do the same thing, yet this morning the company said it is cutting all ties with the company at the center of the story, specialty pharmacy company Philidor (which VRX has an option to own and and is the focus of the scrutiny into VRX’s drug distribution and accounting practices.) The stock is down 8% in the pre-market, even before Ackman has had the opportunity to make his case, placing the stock’s year to date decline at about 30%, with the stock down 60% from its all time highs made in August.
As I have said in this space earlier in the week (here), the economics of the relationships between specialty pharma companies, and specialty pharmacy companies is well above my pay-grade. But VRX’s reaction to the news, and its 3rd largest shareholder’s actions (Ackman publicly stated that he bought 2 million shares last week, adding to his 19.5 million share position heading into the quarter) and his conference call this morning suggest that this is now a very special situation and not likely suitable for the average investor.
But this all brings me to Ackman’s investment style. His firm commits serious resources to researching ideas. They make concentrated bets with stock and options. They make a lot of noise publicly about their view. They then project a sort of Moses on the Mount vibe and then wait for other investors to follow their trade and watch the fabulous gains roll in.
Obviously, other fancy hedge fund managers do most of the above too. But from what I can tell from Ackman’s own public commentary he really stresses that he is doing God’s work more so than others. And that’s fairly off putting to most market participants and the financial press. So when he’s wrong there’s no shortage of schadenfreude in the coverage. Since 2008 Ackman has been off-sides in a very public way in large concentrated investments in Target (TGT), JC Penny (JCP), Herbalife (HLF) and now VRX. There are few aside from his investors who have his back, largely because of his public persona.
So it’s a double edged sword. He benefits from the press coverage of his massive positions but those massive positions come with a ton of risk. And when it comes to investing/trading, why make things harder than they have to be? Ackman routinely does. And knowing how to right size positions and knowing when to pull the plug. Back in 2009, Barron’s wrote about Ackman’s losses in TGT:
Bill Ackman, head of Pershing Square Capital Management, launched the unusual single-stock fund, Pershing Square IV, in 2007, investing $2 billion only in Target call options and other derivatives. The fund lost 90% of that money as Target’s shares plummeted 50%, to 31 earlier this year.
Ackman structured a fund that had no diversification, a ton of leverage that had a decaying value, and the success was largely predicated on his plan for the company, which was at odds with the management & board. His vision for the company was ultimately voted down by shareholders and his fund sustained massive losses. JCP back in 2012/2013 did give in to his vision for the company, but he was wrong. He ultimately turned tail and took very large losses. HLF is a short bet, with the stock up 42% on the year, and up 100% from its 52 week lows, and Ackman is likely a majority of the stock’s 35% short interest. He is famously trapped there.
To quote Matthew McConaughey’s character in the Wolf of Wall Street “I don’t care if you are Warren Buffet or Jimmy Buffet, nobody knows whether a stock is going to go up, down, sideways or in circles”. That’s the argument for diversification in a nutshell. It’s also an argument to avoid concentration and to define stops on the downside that can work within liquidity constraints. Ackman (and his investors) can point to dozens of huge winners for every massive loser, but more and more we’re only hearing about the situations that blow massive holes in his returns.
To further drive the point home about Ackman’s tactics, Herbalife issued the following press release this morning: