Jim Simons is the founder of one of the world’s most successful hedge funds, the Renaissance Technologies fund. The fund has recorded stunning growth, giving it a staggering portfolio value of close to $85 billion. Now the fund’s Q3 trades have been released for investors to pour over, thanks to 13F forms filed by the fund and published by the SEC. In the last quarter, we can see that Simons has made the intriguing decision to stock up on volatile Valeant Pharmaceuticals Intl Inc (NYSE:VRX) while taking profits on Opko Health Inc. (NYSE:OPK).
Jim Simons is the only manager to make Forbes annual hedge fund rich list all 15 years the list has been published. In this time, he has made an estimated $23.5 billion for his own pocket. But Simons didn’t start his professional life in the hedge fund industry. In fact, this award-winning mathematician began his career cracking Cold War codes at the NSA. It was only later, when he was in his 30s and the money was running dry, that he realized this mathematical expertise could be applied to investing.
In a TED interview, Simons reveals that “But in looking at the data, after a while I realized: it looks like there’s some structure here. And I hired a few mathematicians, and we started making some models — just the kind of thing we did back at IDA [Institute for Defense Analyses]. You design an algorithm — you test it out on a computer. Does it work? Doesn’t it work? And so on.” He credits part of the fund’s success for the fact he knew how to hire scientists rather than traditional fundamental traders. And that these scientists knew how to model. And eventually these models got better and better.
These days, Jim Simons is also famous for his secretive and extremely lucrative Medallion fund. The fund is so successful that it is only open to employees. Indeed, the fund is often referred to as the blackest black box in all of finance. But what is known is that the fund uses high frequency trading to exploit inefficiencies in the stock market. For example, one strategy involves using algorithms to pinpoint large transactions and then front run them. Given the fund’s sizeable transaction costs and expenses, it apparently charges fees of over 40%- although bearing in mind the returns most employees are probably only too happy to cough up.
Now let’s take a closer look at these two key third-quarter trades:
Simons upped his investment in controversial pharma giant Valeant in the third quarter. He boosted the fund’s VRX position by 99% with the purchase of 2,377,911 shares. Now the fund holds a total of 4,780,500 shares in Valeant with a value of $68,505,000.
No doubt Simons was pleased with Valeant’s recent earnings report. Valeant shares spiked by 13% in November after the company reported better-than-expected earnings results. Boosted by a strong performance in its Bausch + Lomb eye division, Valeant beat consensus on both the top and bottom line. The company also revealed that it paid down $6 billion from its huge debt pile between the end of the first quarter of 2016 and November 7. Total debt now stands at $27.14 billion.
But despite the news, Deutsche Bank analyst Gregg Gilbert can’t shake his concerns about the stock’s future. First, he acknowledges the improvements at Valeant under the leadership of experienced new CEO Joe Papa. In particular he notes that “VRX has undergone significant change under the new management team, which we applaud for managing near-term debt maturities, returning the core franchises (Salix, Bausch+Lomb / International) to growth, and resolving some legacy legal issues.” And with VRX continuing to deliver on its financial expectations and proactively manage its debt load, Gilbert accepts that the stocks risk/ reward balance is finally improving.
However, he is wary that ‘the potential cost of past sins’ could still represent a setback for VRX. He is now modelling for a legal liability of $500 million versus none previously- although he adds that it is very difficult to predict the timing or magnitude of the liability stemming from these ongoing investigations and lawsuits. Three other issues on this analyst’s mind are as follows: 1) uncertainties around the growth potential and duration of Xifaxan and other franchises; 2) medium-term debt maturities, and; 3) the potential impact of US tax reform.
If we turn to the Street in general, we can see that the stock also has a Hold analyst consensus rating. In the last three months, Valeant has received 3 buy, 7 hold and 3 sell ratings. These analysts have an average price target on the stock of $16.60. Given that VRX is currently trading at $17.25 this suggests downside from the current share price of close to -4%. Worryingly, top analysts have an even more bearish price target on VRX of $14.50.
In the third quarter, Simons sold 541,200 shares in this medical test and medication company. After significantly decreasing the fund’s OPK position by 34%, Simons now holds a total of 1,077,491 shares valued at $7,392,000.
Perhaps Simons is running out of patience with Opko. The stock is down year-to-date from $10.79 to just $5.21. And following very poor third quarter results in November the stock plummeted by over 14%. The company’s EPS of ($0.08) for the third quarter missed the consensus estimate by $0.03. Nonetheless, Cantor Fitzgerald’s Louise Chen is clinging onto her bullish thesis. She remains confident that the biotech can still make it in the long term. In fact, Chen goes as far as to say that she still sees ‘rays of sunshine’ for Opko, and consequently reiterates her buy rating with a very bullish $20 price target (283% upside from the current share price).
In respect of the earnings miss, Chen explains “The decrease in revenue from services, which drove the sales miss, is attributable to lower pricing at BioReference’s GeneDx division.” However, the analyst continues: “Despite these weaker than expected sales, our investment thesis remains intact, and we continue to think that the long-term sales and earnings potential of the company’s business are underappreciated and that upward earnings revisions in 2018+, to levels not reflected in consensus expectations, should drive the stock higher. “
In particular, Chen expects upward earnings revisions to be driven by three key factors: 1) increased uptake of Opko’s FDA-approved kidney disease drug Rayaldee, 2) commercialization of OPK’s branded drug pipeline, and 3) BioReference laboratories sales growth and margin expansion. At the same time, it is worth noting that so far Chen does not have the strongest track record with her stock ratings. Indeed, on Opko specifically she has a 0% success rate and -19% average return across six ratings on the stock.
Aside from this rating, OPK has only received one other analyst rating in the last three months. Five-star Jefferies analyst Brandon Couillard has a cautious hold rating on OPK with a relatively bearish $6 price target- suggesting that perhaps he is more aligned with Simons current take on this stock.