In a follow-up to our report, The Best and Worst Hedge Fund Stocks of 2016, we look at the bottom five and provide some market context.
In a recently-published research report, we catalogued the fifty best and worst performing securities for hedge funds in 2016. In this follow-up post, we’ll take a deeper look at the bottom five worst positions and give context to their performance and impact on our Hedge Fund Universe.
When looking at the five worst performers of 2016, a general theme emerges: the specialty pharmaceutical companies are still suffering the consequences of their price-gouging practices, their high-debt acquisitions, and the increased competition threats caused by the FDA’s desire to increase generic drugs availability. In fact, four of the five worsts stocks in the list fall in the pharma sector.
VALEANT PHARMACEUTICALS INTL (VRX) Return: -96.89%, Selection: -53.99 BPS
It’s hardly surprising that Valeant leads the list of worst performers for 2016. The specialty pharmaceuticals company began its meltdown in 2015 and the problems followed into last year as the stock price fell from $90 in January to $14.5 in December. The low-crowdedness name, currently in the 73rd percentile, continues to have the support of Pershing Square, Paulson, and ValueAct Capital, together representing a total of 15% ownership. However, managers continue selling off and decreasing their positions.
Valeant was one of the first companies to feel the pressures from price-gouging investigations into specialty pharmaceuticals, and its high levels of debt fueled continuous worry over potential bankruptcy. These anxieties around Valeant quickly spread to its peers, as we’ll see in the names that follow.
ALLERGAN PLC (AGN) Return: -36.25%, Selection: -30.90 BPS
Perpetrator number two is none other than Valeant’s long time antagonist, Allergan. The stock started the year at $284 and ended at $210 with a crowdedness score in the 87th percentile. The top three shareholders as of December 2016 were Paulson Co, Third Point, and Elliot Management Corporation, representing total ownership of less than 3% of stock outstanding. As with Valeant, hedge fund ownership continues to decrease as more managers sell out of the name.
2016 saw Allergan involved in a number of highly-publicized deals. The year started among merger talks with Pfizer, but the unsuccessful efforts ended in April 2016. This failed merger attempt corresponds to the sharpest price drop for the year from $268 to $217. The year continued with a smaller Teva deal in August involving the sale of Allergan’s Anda generic pharmaceuticals distribution. During the following months, a number of further deals completed involving ForSight Vision5 in eye-care, RetroSense Therapeutics for photosensitivity gene treatment, Vitae Pharmaceuticals in dermatology care, and finishing the year with LifeCell Corp just to mention a few.
TEVA PHARMACEUTICALS (TEVA) Return: -45.52%, Selection: -16.19 BPS
Cue in specialty pharmaceutical company number 3. Teva, the largest producer of generics, has seen its price consistently drop since the beginning of the year, starting at $61 and ending at $36. The stock has a crowdedness score in the 88th percentile, with investments by Viking Global Investors, Paulson Co, and PointState Capital at 5% of shares outstanding.
As previously mentioned, Teva acquired the Anda generics business from Allergan PLC and is currently in the works for integrating this acquisition into its operations, aspiring for some acquisition-driven revenue growth. The company is hoping this will improve their outlook as decreased sales resulted in lower revenue throughout the year. In more dramatic news, Teva recently agreed to a settlement of $519 million for foreign-bribery charges in its Ukraine, Mexico, and Russia operations. Some of the charges declare that Teva executives bribed a high-ranking Russian government official during the annual health ministry auction to receive favorable sales increases of Copaxone, a multiple sclerosis drug.
JD.COM INC -ADR (JD) Return: -24.86%, Selection: -12.49 BPS
The second largest e-commerce company in China is the only non-pharma stock in this list—and the most crowded, with a score in the 91st percentile. The stock experienced a sharp price drop in the middle of 2016, going from $26 in January to a low of $21 in June. However, it had a healthy recovery to $25 by the end of December. Among the funds holding the name, the top three are Tiger Global, owning 2.3% of shares outstanding, followed by Viking Global at 1.87% and Coatue Capital at 0.83%.
JD continues to hold a disadvantageous position compared to Alibaba, mainly due to Alibaba’s first-mover advantage, stronger financial position, and larger number of users. When adding the slowdown in Chinese consumption to the mix, it was not surprising to see JD miss market expectations in the first half of 2016.
ENDO INTERNATIONAL PLC (ENDP) Return: -81.88%, Selection: -9.36 BPS
Returning to specialty pharmaceuticals, Endo experienced a sharp price drop within the first half of 2016. ENDO started the year at $55 in January, hit a low of $16 in May and continued fluctuating around this price for the remainder of the year. As of December 2016, the top 4 funds holding the name were Paulson & Co at approximately 4% of shares outstanding, and Glenview Capital, Camber Capital, and Ascend Capital, each at approximately 2%. Following the same pattern as the previous pharma stocks in this article, the stock isn’t too crowded at the 75th percentile of crowded names.
Endo fell victim to the general pharma sector selloff occurring after the Valeant contamination. The company felt the price pressures in its generics segment and the potential for increased competition for its Voltaren pain medication. The main hit to the stock price came after the company lowered their revenue guidance for 2016. However, Endo is hoping the effect of the falling Voltaren sales will be somewhat offset by the launch of their new pain medication, Belbuca, and by the positive expansions from the Par Pharmaceuticals acquisition which significantly expanded Endo’s R&D capabilities. The forecasts for the beginning of 2017 are looking mixed so far, but the majority of Investment researchers are grading the stock as Neutral at the beginning of January.
For more of the worst stocks for 2016, download our report, The Best and Worst Hedge Fund Stocks of 2016. In this report, you’ll also find aggregate sector performance, individual sector performance, and the best hedge fund stocks for 2016.Published on January 18, 2017