Sharing one's investment ideas and process with other market
participants can be a powerful method for money managers to advance
their careers and practices. We built Seeking Alpha's editorial
platform upon this opportunity, sourcing rigorous research from
investment professionals and placing those contributors' ideas
before a sophisticated investing community.
No case in recent memory demonstrates the upside of this
approach as strongly as Cara Goldenberg's. Ms. Goldenberg,
29-year-old co-founder of hedge fund Permian Investment Partners,
took the initiative to send Warren Buffett her ten top investment
ideas in November. Buffett liked the unsolicited research so much
he invited Goldenberg to Omaha to join him for a discussion and
dinner. As Frank Betz of Carret Zane Capital Management
commented to Bloomberg
, "She hit the jackpot. It's praise from Caesar, of course. Boy, it
must've been one heck of a letter."
We asked Ms. Goldenberg to share three of the ideas she sent to
Buffett. We'll present them in two parts, today and tomorrow, as
part of our ongoing
High Conviction series
~ Mick Weinstein, Editor in Chief
Seeking Alpha: What are your three highest conviction
positions in your fund - long or short?
Our three highest conviction positions are all longs. We know
the management teams well. We have studied their track records, met
them several times and appreciate their level of incentive and
ability to drive value creation.
The first is
Valeant Pharmaceuticals (
While just two of nine sell-side analysts who cover it consider
Valeant a buy, we see a high-quality, growing business worth more
than 3x the current share price. Valeant operates three business
units: Specialty Pharmaceuticals, Branded Generics Europe and
Branded Generics Latin America.
CEO Mike Pearson, formerly responsible for significant growth at
McKinsey where he took the firm's global healthcare practice from
$150mm to $1.9 billion in less than ten years, has a reputation of
meeting and exceeding ambitious internal targets. Valeant's growth
has trumped sales forecasts every quarter since Pearson took the
helm, because of his ability to leverage his distribution network
to push through strong brands, both existing and acquired.
To illustrate this point, Pearson was in Australia in February 2009
purchasing an $8mm dermatology product. While in a local pharmacy
to better understand the sales process for the potential
acquisition, Pearson began asking a young man dressed in a Gecko
costume about a vitamin formula that he was selling. The Gecko was
in fact the CEO. The following day, Pearson purchased 100% of the
Gecko's company for $15,000 cash with no earn-out. For the ten
months ending Dec-2009, Valeant generated ~$500,000 in sales from
the Gecko's product after expanding the sales base from 5
pharmacies to 100+ by year-end.
This example is being replicated on a larger scale many times
over. Many strong local brands have neither the sales potential to
attract large healthcare players, nor the management savvy, scale
or distribution network to optimize sales on their own. Valeant
will continue to roll-up these opportunities with 15% IRRs,
assuming no sales growth (15% IRR purely from cost-cutting).
Typically, Valeant buys these businesses for 1.0x sales or less
(currently valued at 2.9x sales due to margin conversion). There is
currently no ceiling to the growth this Company can generate over
the coming few years.
To what extent is this a sector pick, as opposed to a
pure bottom-up pick?
We are not particularly bullish on healthcare. We think Valeant
will generate significant absolute returns in just about any market
environment, and at the very least, will generate significant
relative out-performance. The stock appears extremely undervalued
with clear market dislocations, which should provide a sufficient
margin of safety with a 1+ year time horizon.
How would you describe Valeant's competitive environment
and its positioning?
For Valeant, the competitive landscape is rational and limited.
Most of its branded generics or consumer cosmetic products have
been well-entrenched for years, if not decades. The specialty
pharma business has three drugs that have approached patent expiry,
yet the Company will grow top-line by more than 20% organically
despite declines from these drugs (<15% of 2010 sales).
Just as importantly, Valeant has had opportunities for cheap
acquisitions by executing cash purchases in areas with less
competition such as in Mexico and Australia. This enables the
smaller, acquired companies to take advantage of Valeant's
economies of scale to reduce costs and leverage Valeant's
formidable distribution network; meanwhile, Valeant can take
advantage of new geographical exposure to bring some of its other
products into new markets. The opportunity exists because larger
pharmaceutical companies mostly ignore the $2-$20mm branded generic
space, simply because an acquisition of this size cannot move the
needle. Meanwhile, Valeant might make 50-100 of these this
What are your thoughts on Valeant's valuation? How does
its valuation compare to its peer group?
Valeant trades at 13x 2010, 9x 2011 and <4x our 2014 cash
earnings estimate. The peer group typically is composed of pharma
companies like Medicis (
), Endo (
), and Forest Labs (
). The group trades at around 11x 2010 earnings, but with little to
no growth forecasted thereafter. We largely ignore relative
valuation for Valeant given the significantly more sustainable
business model, mid-teens ROIC, 25-40% top-line growth and 35-60%
What is the current sentiment on the stock? How does your
view differ from the consensus?
Sentiment on Valeant is embarrassingly bearish, with just two
'Buys,' four 'Holds' and four 'Sells.' The market dislocation is
abundantly clear and somewhat comical, if not slightly offensive,
to management. The sell-side fails to understand the structural
drivers behind the dramatic growth. Analysts that follow the stock
do not appreciate the broad portfolio (most drugs between $3-$5mm)
or the turnaround potential, and instead focus on the US Specialty
pharma (<45% of the business).
As a result, 2008 EPS estimates for 2009 went from $0.64 when
CEO Pearson joined in spring of 2008 to $2.13 today. We think $2.20
is more likely. 2010 estimates have increased from $0.64 in late
2008 to $2.53 today. We think $3.00 is more likely. The previous
management team was comprised largely of scientists focused on
developing drugs, as opposed to maximizing shareholder value. The
result was spending large sums of money to market drugs where the
addressable market was literally non-existent, and a complete
absence of focus on the gems inside the portfolio. Pearson has
completely overhauled the entire Valeant salesforce. It appears
that analysts will continue to chase quarterly earnings higher and
higher, while ignoring the structural drivers behind the impressive
Does Valeant's management play a role in your
Management quality is the key pillar behind our investment
philosophy. We invest behind management teams with proven track
records and incentives that are aligned with investors.
We offer an analogy to explain why we invest behind management:
Imagine you could assiduously turn over an infinite number of
stones only to select the most extraordinary ten. Those ten stones
represent your highest conviction equity investments as measured by
valuation, market dislocation, business quality, margin of safety
and, of course, management quality. Now imagine that each of those
management teams are themselves working diligently to turn over an
infinite number of stones in order to pick pennies off the ground
for investors, pennies that most management teams unknowingly step
over, kick to the side of the road (probably en route to a major
sporting event that they have elected to sponsor directly out of
distributable funds to shareholders). This analogy represents
Permian's philosophical edge: the compounded effect of our team
out-hustling our competition to source the most overlooked and
non-consensus investment ideas, and the management teams we choose,
in turn, out-hustling their competition.
There are of course an infinite number of ways to cut the deck
when it comes to investing, but we believe our approach is unique
and allows for the construction of an exceptionally original
portfolio with a highly asymmetric risk/return profile regardless
of market direction.
What catalysts do you see that could move the
Presuming the analyst community never awakens to the drivers behind
the earnings power of the business, Valeant's share price will
likely continue to grow with earnings, with quarterly announcements
serving as the primary catalysts. We are content with 35-50% share
price growth per year for the next five years. BofA/Merrill Lynch
is the only bulge bracket bank that covers the name. With a market
cap of $3 billion, it is reasonable to assume that more (and
hopefully better) sellside research analysts will initiate
What could go wrong with this stock pick?
At Valeant, we worry most about key-man-risk. Mike Pearson has
turned around this ship single-handedly, and it is now sailing
beautifully. It is nearly impossible to see anybody else
accomplishing what he has, and will continue to accomplish at the
helm of Valeant.
Thank you very much, Cara.
Happy to participate.
Permian Investment Partners is long VRX
Tomorrow, we'll publish the second part of Cara's
Goldenberg's top ideas that impressed Buffett.
Read more High Conviction Picks »
If you are a fund manager and interested in doing an
interview with us on your highest conviction stock holding,
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