Hedge Fund Letters are a Great Source for Ideas
I always find hedge fund letters to investors to be an excellent place to look for investment ideas. The latest letter from Glennview Capital Management is no exception. In it the fund provides a detailed description of why it is long a number of stocks, along the way citing similar examples of successful investments that the fund has made in the past. The letter is very detailed and it is a great read. Here's a couple of investments that caught my eye:
In the case of Pharmaceutical Services, history may in fact repeat itself. In the coming three years, the industry will benefit both from a second wave of generics, as shown in the following chart, as well as a volume uplift driven by federal healthcare policy, this time in 2014 driven by the universal healthcare coverage aspects of the recent
healthcare reform legislation.
The reasons that Glennview cited for investing in McKesson are the same reasons that I currently personally have long positions in Cardinal Health (CAH) and CVS.
New management is often a catalyst to refocus the mission and redefine the business portfolio to orient the company around disciplined financial objectives of per share value growth and return on capital invested. Such was the case in WellPoint, where they sacrificed their position as a healthcare conglomerate and instead created better shareholder value and delivered superior benefits to their clients by selling their PBM business to Express Scripts in 2009.
In December 2010, Pfizer announced a management shakeup that promoted Ian Read to CEO, and with that move, new management and the board seem to have a renewed and refreshing focus on shareholder value. Pfizer is the largest manufacturer of prescription biopharmaceuticals globally. In addition to its biopharma division, the company operates animal health, consumer, nutritionals, and drug delivery system businesses. Consistent with big pharma’s focus on size and scale, Pfizer has pursued a strategy of horizontal integration over the years, purchasing Warner Lambert in 2000, Pharmacia in 2003, and more recently Wyeth in 2009. While the idea of horizontal consolidation in pharmaceuticals is reasonable, other ancillary businesses were also aggregated while core products came closer to their patent cliffs in 2012-2014. After years of aggregation and pouring $40 billion into research pipelines over the past five years with little new product generation to show for it, Pfizer and its new CEO seem determined to plot a different course:
i) Management in presentations in the last three months has started every conversation with an acknowledgement that Pfizer must improve shareholder returns. This is a noted change in focus, timing and message.
ii) Furthermore, management has undertaken a strategic review of all non-core businesses with a view towards divesting, monetizing or spinning off those franchises that can generate superior value as independent companies or as divisions of other healthcare firms. Management is on record saying they hope to have their review, and definitive actions, completed before year-end...
The size of the prize is meaningful: We believe the sum of Pfizer’s component parts is worth $27 per share today, a 50% premium to our $18 entry point a few months ago.
I too am long PFE. This investment is from before I became more of a pure special situation investor. There's always room in one's portfolio for a company that is just plain too cheap and pays you a solid dividend to wait for Mr. Market to realize its true value. The recent talk that PFE could spin-off certain divisions to unlock value is the icing on the cake. Just today I seriously considered adding to my stake in the company, which has risen 25% since I originally invested in it. Obviously given the fact hat I am writing about it now I decided to wait on adding to my position, perhaps thinking that it will come back down to Earth a little after all of this spin-off talk quiets down. I'm still tempted to add though.
Such was the case in 2002, when investors abandoned securities in power plants at 10 cents on the dollar of replacement costs, as well as securities in cell phone towers and rural cellular networks where the 3G investments had been made but the 3G revenue streams were yet to materialize. However, while such scenarios do not look attractive as measured on a short investment duration, a two to five year investment horizon yields a much different outlook. In these circumstances, it is precisely the best time to invest – when the capital spending is behind you, and the return on investment is in the intermediate future.
We currently own common equity and debt in Clearwire Corporation (“Clearwire”), which owns 45 billion MHz of wireless spectrum and operates the nation’s first true 4G wireless network. To date, Clearwire has invested approximately $20 billion5 in buying spectrum and funding the buildout of its wireless network to its current
coverage of 120 MHz pops. Its present enterprise value is $12 billion, meaning you are creating the firm for 60% of invested capital. Importantly, we believe replacement cost is significantly greater than $20 billion given the scarcity of the spectrum assets and the time value of money.
Also embedded within the letter are pearls of wisdom like this:
Perhaps the lowest risk prediction an investor can make is that one year from now, one year shall pass. This seems obvious and useless, but we are astounded by the number of opportunities presented by time arbitrage, the gap between what people are willing to pay for events that are certain or nearly certain, but some time out in the future.
Time arbitrage has helped us on the short side in various situations: shorting stocks whose profits are driven by only three more years of patent exclusivity, only two more years of below market oil hedges or only one more year of an unusually low tax rate due to prior NOLs. On the long side, many of our healthcare investments harnessed demographic trends and regulatory outcomes that were a certainty with the passage of time. Additionally, purchasing hard assets like power plants and cell phone towers in the 2002 distressed cycle simply required some patience so that time could pass, allowing demand to grow into fixed supply.
Glennview Capital Management Letter - March 2011