Trading pioneer Cliff Asness displayed a bearish attitude to a number of key stocks in the last quarter, including Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Facebook Inc (NASDAQ:FB), and Advanced Micro Devices (NASDAQ:AMD). Asness is founder and Chief Investment Officer of the highly successful $72.4 billion AQR Capital Management fund.
Asness has a prestigious background in the world of finance. He gained a PhD in finance from the University of Chicago, where he was taught by Nobel Prize winner Eugene Fama. Asness set out to prove in his thesis that you can beat the market, time after time, by exploiting a stock’s fundamental value and momentum. He used these principals at Goldman Sachs following before co-founding quant fund AQR Capital Management in 1997.
AQR is a unique fund that employs both active and passive strategies. The fund suffered during the financial crisis, (allegedly losing 50% in 2007 and 2008) but returned to growth later on through revitalizing its investing approach. In particular, the fund began to use lower-fee, liquid and transparent assets like mutual funds that can automatically execute trades based on computer-generated models. As investors began to resent paying high fees for other funds generating underwhelming returns, this low-fee strategy made the fund a popular choice. Now AQR has 750 employees with several different funds based on different strategieds, some of which are bringing annualized returns of over 9% (AQR Style Premia).
“AQR has brought alternative strategies to the mainstream not by trying to outperform everyone, but by trying to provide the inherent average return in the alternative space,” says Morningstar analyst Tayfun Icten who covers AQR’s funds. “They were early in this commoditization process that coincided with hedge funds struggling and put together the right packet for investors that were looking for something like this and AQR just hit it.”
So, bearing this in mind, let’s now dig deeper into how Asness played the last quarter:
Valeant Pharmaceuticals Intl Inc
In the last quarter, Asness showed Valeant no mercy. He chopped his holding of VRX stock by 11% down to 316,880 shares worth approx. $3.5 million. This makes VRX a negligible holding for the portfolio.
Despite a solid performance second quarter performance, there are a number of concerns that continue to linger. For example, even though new CEO Joe Papa is on track to bring down debt by $5 billion, Valeant’s debt still remains exceedingly high and the repaying the interest alone is a big burden for the stock. For example, if we presume a long-term debt of $25 billion, then Valeant will need to make quarterly interest repayments of roughly $370 million. This easily overshadows the company’s current level of operating income.
The debt is one reason why Piper Jaffray analyst David Amsellem decided to reiterate his sell rating on VRX. Nonetheless he raised his price target from $10 to $14 on August 9 in light of the company’s recent earnings report. His new price target stands at a marginal downside from the current share price. According to Amsellem, bright spots in the report included encouraging performance by eye unit Bausch and Lomb and Xifaxan for irritable bowel syndrome. (To watch Amsellem’s track record, click here)
Valeant has a Hold analyst consensus rating. This is because, in the last three months, the stock has received 3 buy, 7 hold and 3 sell ratings from analysts. In terms of price, analysts have an average price target on VRX of $17.08 which stands at an upside of 18.5% from the current share price.
Asness displayed the same cautious attitude towards social media giant Facebook. He cut back the fund’s FB holding by 15% to 2.9 million shares valued at $414.6 million. This is equivalent to about 0.55% of the total portfolio.
All eyes are on a whole raft of new avenues Facebook is currently exploring. For example, on August 15 Facebook took a step away from simply peer-to-peer sales. Select users of the mobile app will now see a new Daily Deals tab which displays deals from eBay. In other words users can browse eBay deals in the Facebook app. However, to pay they need to transfer to the eBay site.
Facebook is also working on its Watch video section which will bring new video content to FB users. The difference to FB’s YouTube platform is that the videos will be personalized based on recommendations from family and friends. One-day FB even plans to create and produce its own short episodic video content which will enable it to maintain maximum ad revenue return.
Facebook has a Strong Buy analyst consensus rating according to TipRanks. In the last three months Facebook has received 30 buy ratings and just 2 hold ratings and 2 sell ratings. The $192.8 average analyst price target works out at just over a 13% upside from the current share price.
Advanced Micro Devices, Inc.
Asness slashed the fund’s holding in AMD by 22% in the second quarter. The fund now holds just over 2.5 million shares valued at $37.3 million. This works out at approximately 0.04% of the total portfolio.
In contrast to Asness it would appear the Street is moving towards a more bullish conviction on this volatile semiconductor stock. A key reason is the growing popularity of the Ryzen processors despite fierce competition from larger rival Intel. The processors, launched at the beginning of March, are better at multi-tasking and productivity because they have double the processor cores of Intel’s equivalent offering.
“Our industry checks show improving mindshare/shelf-space for AMD’s new Ryzen desktop-PC processors, incl. 30-50% share at prominent e-tailors, well ahead of AMD’s 11% current desktop unit share,” top Merrill Lynch analyst Vivek Arya said earlier this week. Arya concluded: “The key conclusion is that AMD has momentum which should gradually translate to share gains.” Five-star Arya has an $18 price target on AMD which translates into big upside potential of 39%. (To watch Arya’s track record, click here)
AMD has a Moderate Buy analyst consensus rating on TipRanks. In the last three months the stock has received 9 buy, 11 hold and 3 sell ratings. Meanwhile the average analyst price target of $14.08 stands at a 9.49% upside from the current share price.