Written by Mark Melin
One of the shining female stars of Wall Street is carefully watching her hedge fund’s exposure to healthcare after experiencing the worst quarterly performance in the fund’s history. With the Tiger Ratan hedge fund down a whopping 20.9 percent in September, according to a letter to investors reviewed by ValueWalk, the fund founded by Nehal Chopra is repositioning for the future. While the healthcare bet didn’t work out as planned, Chopra’s short exposure to Walmart did benefit the portfolio, which was down 3.8 percent year to date as of the end of September. The negative performance is rare for Chopra, who was up 22.3 percent, 46.8 percent and 26.3 percent in the previous three years respectively and has not had a losing year since the fund’s founding in 2009.
Source – Q3 2015 letter to investors
Chopra’s shorts in Walmart and Pier One cushion tough quarterly results
It was the shorts in Tiger Ratan’s $1 billion portfolio that benefited investors the most, as betting the stocks would go lower “acted according to plan.” Shorts in the portfolio added 4.9 percent in value during the third quarter, with bets against Pier One and Walmart leading the way.
Walmart, which traded near $87 per share the first week of 2015, saw its stock plummet on fears that Amazon.com was going to eat the discount retailer’s customers, trading down near $57 as recently as yesterday. But just today the $3.3 billion retailer reported that existing U.S. store sales rose by 1.5 percent in the third quarter, the fifth straight quarter of growth after long periods of declines. The stock bounced today on the news, closing in on $60 per share in mid-afternoon trading. Certain technical indicators on the stock turned higher in early November and remained a buy signal even as the stock price broke into new lows last Friday.
The short thesis on Walmart – that online shopping would hamper performance – was also behind the hedge fund’s short logic behind Pier One. The stock reached a high of $17.31 towards the end of January and is now trading near $6.53 per share, a dramatic plunge and a benefit to the Tiger Ratan portfolio. Chopra wrote that the retailer is increasingly facing secular pressures from consumers shifting their home furnishing shopping online.
“Their margins have continued to worsen, and it was hard to see why they would increase as they continue to face the challenge of declining traffic and declining same-store sales in stores,” Ratan wrote.
After taking a significant dive in price, Oppenheimer lowered its earnings per share projection for the company last Friday, predicting the firm would earn one penny below consensus estimates of 12 cents per share when it reports fourth quarter earnings. Previous to this, Credit Suisse analysts cut their price target on Monday, November 2 and Morgan Stanley reduced their estimates on the same day. The stock is up today after the company reported results which exceeded analyst estimates.
Source – Q3 2015 letter to investors
Long exposure to healthcare, Valeant and Altice hurt Chopra
While the short exposure was the standout in the Tiger Ratan portfolio, it was the more numerous long exposures that rained on the hedge fund’s parade in the third quarter. The long book erased 33.5 percent from the portfolio and was heavily concentrated in healthcare names that were at the center of the recent selloff, led by Valeant Pharmaceuticals. The loss was approximately $300 million, and the hedge fund now manages slightly over $1 billion, as first reported by Rob Copeland of The Wall Street Journal.
For Chopra, the healthcare selloff all started with a tweet on September 21. This is when “Hillary Clinton declared war against rising drug prices,” signaling out bad boy poster child “Turing Pharmaceuticals as a villain for raising prices on an old drug by 60x in a short time frame.”
Chopra believes that substantial legislative changes can be forced upon the drug industry, but she anticipates that “self-restraint from the companies” will win the day, not government mandated change. But she says that given it is a presidential election season, “the political rhetoric is unlikely to abate.”
It is in an environment of drug price increase self-restraint that the appetite for acquiring drug makers with older patent portfolios might seem less appetizing. “We have adjusted our exposures in light of these developments,” she wrote. “While the fundamental health of these businesses remains robust and the management teams are as brilliant as ever, the regulatory/political environment is decidedly hostile.”
What could be hurting the Valeant exposure may be weak demand for Addyi, the female libido-boosting pill produced by Sprout Pharmaceuticals, a subsidiary Valeant Pharmaceuticals acquired in August for $1 billion. The pharmaceutical company launched Addyi in the United States on October 17, and demand for the female sexual enhancement drug is limping along with only 227 prescriptions since its launch on October 17. Compared with the nearly half a million prescriptions for Viagra during its first month on the market in 1998, and excitement for the drug – and Valeant shares – seems to be less than enthusiastic.
Other long bets that tripped up the hedge fund in the third quarter include Altice, which dropped in price from roughly €31 to €19 over likely disappointment surrounding the failure of the proposed acquisition of Bouygues Telecom. Likewise an investment in Liberty Global fell when an anticipated transaction with Vodafone was said to have been derailed due to a tax strategy issue.
Chopra thinks portfolio is built to tackle future with “less risky” sector choices
There is a silver lining in what was a challenging quarter for the rising star hedge fund manager. “Even though we got our downside estimates on each stock wrong, it was not by much,” she wrote, noting that an odd confluence of events hampered performance. This included Hillary’s tweet, the lack of a deal with Liberty and dynamics behind Altice’s and their equity raise.
Going forward, the hedge fund thinks their long positions are relatively less sensitive to macro-economic concerns, with “less risky” sector choices. The hedge fund has significant long exposure to Communications (87.2 percent), Consumer Non-Cyclical (18.9 percent) and Healthcare, now down to 14.7 percent. The fund has “almost no exposure to major macro vectors – oil, interest rates, or China.”
Considering additional downside potential, Chopra looks for “any obvious correlations among the positions.” While correlation is not causation, she notes a potential “sensitivity to high yield credit spreads and the possibility that a general deleveraging in the hedge fund space might have an adverse effect.” It is such that if risk management planning, considering the negative outcomes along with the positive, which separate the average from the great hedge fund manager. All great hedge fund managers have difficult periods of time and the third quarter of 2015 – particularly August and September – were the two worst in the hedge fund’s history. This Chopra explains by citing Murphy’s law to explain the quarter: whatever could go wrong, did go wrong.
Comments
Log in or sign up to join the conversation.