Blue Ridge Capital’s position in Actavis
Blue Ridge’s position in Actavis (ACT) accounted for 5.07% of its 4Q14 portfolio and is worth $418 million. The hedge fund reduced its position in the stock by 110,000 shares in the fourth quarter.
According to aggregated 13F data, 58 hedge funds closed their positions in ACT in the fourth quarter of 2014 and a total of 282 hedge funds lowered their positions in ACT in 4Q14.
Among those funds that reduced shares of ACT in their portfolio in 4Q14, in terms of dollar value invested, Blue Ridge Capital ranked sixth. Franklin Resources, Oz Management, Janus Capital, and Jana Partners were other hedge funds that lowered their positions in ACT in the fourth quarter.
Potential reasons why hedge funds lowered their stakes in Actavis
Actavis (ACT) operates in a dynamic environment that involves a number of risks that threaten the generic pharmaceutical industry. These risks could have a material adverse effect on the company’s operating and financial results. Because the company is operational worldwide, foreign exchange fluctuations can have an adverse impact on the costs that the company incurs through its international operations. Other risks could be geography risks, product pipeline delay risks, and integration risks.
A company’s valuation reflects the market’s view of the company’s growth prospects. The forward EV/EBIDTA (or enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is used to look at the expected profitability of a company. A lower forward multiple in comparison to the LTM (or last 12 months) multiple generally means the company’s profits will increase.
Actavis’s forward EV/EBIDTA multiple is 13.7x, slightly higher than the industry average, which covers generic and specialty pharma companies like Teva (TEVA), Mylan (MYL), Impax (IPXL), Hospira (HSP), and Perrigo (PRGO). Stocks like Hospira at 18.9x and Perrigo at 15.5x also have a higher forward enterprise-to-EBITDA multiple.
These potential reasons give an indication as to why institutional investors lowered stakes in Actavis.
Actavis’s performance versus competitors and other benchmarks
From a portfolio management perspective, an allocation in a particular stock is inherently a bet that the stock will outperform the benchmarks associated with measuring the stock’s performance.
As seen from the above graph, ACT has outperformed all of its benchmark indices, including ETFs such as the iShares US Healthcare (IYH) and the Healthcare Select Sector SPDR fund (XLV). Thus this could be a reason that the hedge fund didn’t close its position in the stock, but instead just reduced it. Also, despite reporting a net loss of $512 million in the first quarter of 2015, Actavis beat Wall Street estimates on earnings per share.
The better-than-expected performance and the fact that Actavis outperformed benchmark indices might factor into some hedge funds’ bullish perspective about its earnings growth.