Large long positions in Amazon.com (AMZN) and Alphabet Inc. (GOOG), alongside a well-timed short on the Energy sector, were just three trades that helped Andreas Halvorsen's long/short fund, Viking Global Equities rack up a gain of 4% for the fourth quarter of last year. For the full-year, the fund gained 8.3% with volatility of 9.9% compared to a return of 2.1% for the fund’s benchmark, the MSCI World Index and 1.4% for the S&P 500.
The Viking Long Fund (VLF), by contrast, generated a return for investors of 5.7% in the fourth quarter and 4.5% for the full-year, according to a letter sent to investors on January 14th 2016 and reviewed by ValueWalk.
Viking Global: Positive but mixed year
While both of Viking’s funds were able to outperform significantly their benchmarks last year, the funds experienced sizable losses among some key longs, which cost several percentage points of performance. Specifically, in the fourth quarter, Valeant (VRX) cost VLF and VGE 1.6%. For the full-year, Viking’s most costly longs were Cheniere Energy Inc. LNG (-1.4%), Mallinckrodt Plc. MNK (-1.2%), Alibaba Group Holding Ltd. BABA (-1.0%) and Micron Technology Inc. MU (-0.8%).
On the long side, the top performing sectors for both funds were Information Technology and Consumer Discretionary. The worst performing sectors for both the full-year and fourth quarter were healthcare in VGE and energy in VLF.
Alphabet was the biggest winner for both funds in the fourth quarter, contributing 1.7%. Alphabet was also VLF’s biggest winner for the year contributing 2.6%. VGE’s biggest winner was an Energy short contributing 4.6% to performance. Amazon.com was the second largest winner for VLF and third largest winner for VGE adding 2.3% and 2.4% respectively to performance for the full-year.
Viking Global: Valeant and Cheniere remain undervalued
Viking Global owns more than 5 million shares of Valeant Pharmaceuticals across its two funds, making the hedge fund one of the embattled pharma company’s largest shareholders.
And the despite controversy that’s surrounded Valeant for much of the past six months, the hedge fund remains supportive of the firm. In fact, Viking reports that it continued to add to its Valeant position during the first few weeks of the fourth quarter.
Chart via S&P Capital IQ
Viking writes in its fourth quarter and full-year letter to investors that it believes Valeant’s business model is still valid and even with the operational disruption and loss of revenue caused by the shutdown of the Philidor sales channel, the company’s valuation remains attractive. The hedge fund goes one to report that according to its analysis, less than a third of Valeant’s revenue growth in 2014-2015 resulted from aggressive price increases on drugs. Underlying volume growth was in the high single-digits, which compares favorably to the group’s specialty pharmacy peers.
Despite the allegations made against Valeant, Viking is encouraged by the steps the company has taken to clean up its act, including severing ties with Philidor, signing a new long-term distribution deal with Walgreens (WBA) and lowering prices for certain drugs, (these lower prices will produce anticipated annual savings of up to $600 million for the healthcare system.) On top of these positive factors, Viking sees the Bausch & Lomb contact lens franchise, the Salix gastroenterology business and Valeant’s internally developed dermatology pipeline as key drivers of future growth. The hedge fund is not troubled by the recent departure of the CEO and is confident in the new chief, Howard Schiller.
Cheniere Energy was Viking’s largest loss-maker for 2015. Down 56% over the past twelve months, Cheniere’s shares look unappealing to all but the most contrarian of investors. However, Viking continues to believe that the stock offers value. The fund notes even though the outlook for the LNG market has deteriorated over the past year, Cheniere’s low cost of production and long-term supply contracts give it an edge over its peers. Viking also says that a valuation based solely on Cheniere’s long-dated contracts with high-quality counterparties implies significant upside from current levels.
Comments
Log in or sign up to join the conversation.