Grantham's GMO More Than Quadrupled Valeant Stake in Quarter

  • Joins other prominent value investors who added to the stock
  • Valeant shares down about 70% since reaching an August peak

Grantham Mayo Van Otterloo & Co., known for the bearish views of founder Jeremy Grantham, more than quadrupled its holdings of Valeant Pharmaceutical International Inc. last quarter, leading a slew of investors who added the stock before it lost more than half of its value.

Boston-based GMO added 6.5 million shares of Valeant, bringing its total stake to 8.2 million shares, according to a regulatory filing. The firm’s stake in the drug company was valued at $1.46 billion at the end of last quarter, its biggest U.S. stock holding. Stephen Mandel’s Lone Pine Capital, Andreas Halvorsen’s Viking Global Investors and Jonathan Auerbach’s Hound Partners also increased their stakes.

Valeant has proved to be a costly trap for a number of well-known value investors including Ruane Cunniff & Goldfarb Inc., managers of the Sequoia Fund, and Bill Ackman of Pershing Square Capital Management. The drugmaker has lost 60 percent of its market value since the end of the third quarter and more than 70 percent since reaching a peak in August, as politicians questioned its drug-price increases and a short-seller accused the firm of inflating sales.

Ruane Cunniff & Goldfarb, the largest holder of Valeant, bought 2 million shares during the fourth quarter, bringing its holdings to 35.9 million shares, or 10.5 percent of total shares as of Oct. 31. The $7.2 billion Sequoia Fund had 29 percent of its assets in Valeant as of June 30.

Ackman’s Defense

Sequoia, the best-performing major U.S. stock fund this year until early August, has dropped to the bottom of its peer group as Valeant slumped. It’s down 13 percent this year through Nov. 16, trailing 96 percent of similar funds. Two of the five independent directors of the fund resigned last month in a disagreement over the size of the investment.

Ackman, in a four-hour call with investors Oct. 30, defended his investment and said he bought an additional 2.1 million Valeant shares, bringing his total stake to more than 21 million shares. In that same call, Ackman predicted Valeant would reach $448 a share by 2019.

Valeant fell 2.5 percent to $71.50 at 12:11 p.m. on Tuesday in New York. The stock peaked at $263.81 on Aug. 6.

Mandel’s Lone Pine added 2.2 million shares of Valeant in the third quarter, bringing its stake to 7.5 million shares. Andreas Halvorsen’s Viking Global Investors boosted its position to 5 million shares after buying 376,615 shares in the quarter.

Jana Exits

Hound Partners, known as a Tiger cub because it received a startup investment from Julian Robertson’s Tiger Management, added 1.2 million shares of Valeant, bringing its stake to 3.9 million shares valued at $695 million at the end of last quarter. That’s equal to almost 18 percent of the firm’s $4 billion U.S. public equity portfolio, according to data compiled by Bloomberg.

Other investors went in the opposite direction. Barry Rosenstein’s Jana Partners eliminated its Valeant position of about 1.3 million shares in the third quarter. Wally Weitz, a value investor from Warren Buffett’s home town of Omaha, Nebraska, said his firm exited its remaining investment in Valeant in late October, citing “recent developments about the company’s pharmacy relationships, pricing policies and business practices.”

Omega Advisors, the firm founded by Leon Cooperman, took a new, $86 million stake in Valeant last quarter. It has since exited the position, Reuters reported, citing Steven Einhorn, the firm’s vice chairman.

Grantham’s Views

GMO spokesman Tucker Hewes declined to comment on the firm’s Valeant stake. Officials for Viking, Omega, Hound Partners and Lone Pine didn’t immediately return phone calls seeking comment.

Grantham, his firm’s chief investment strategist, is closely followed in the investing community for his bearish, and often accurate, outlooks. In 2000, he correctly predicted that stocks would lose ground in the next decade. His firm is forecasting that U.S. large cap stocks will have an annual inflation-adjusted return of -0.6 percent a year for the next seven years, according to the GMO website. GMO manages $104 billion.

Money managers who oversee more than $100 million in U.S. equities must file a Form 13F within 45 days of the end of each quarter to list their holdings in stocks that trade on U.S. exchanges, as well as options and convertible debt. The filings don’t show non-U.S. traded securities or wagers against stocks.

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