Kevin D Eng of the $2 billion Colombus Hill Management fund has made some intriguing shifts in his Q1 portfolio including boosting his position in controversial pharma Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and initiating stakes in key e-stocks Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL). Let’s get some background insights into Kevin D Eng and his fund first before we examine these moves further.
There is a sparsity of personal information on Kevin D Eng but we can see that he studied Economics at the prestigious Wharton School of the University of Pennsylvania. His career in funds involves stints at both Appaloosa Management (1995-2003) and managing director of Duquesne Capital Management (2003-2006). He founded Columbus Hill in 2006 where he is currently CEO and Chief Investment Officer.
The fund itself leans towards the basic materials sector (35% of the portfolio) and made a gain of 22% over the last 12 months. On a three-year annualized basis the fund has returned a more modest 12% with a Sharpe ratio of 1.46 (meaning the portfolio is slightly riskier than the average hedge fund which has a ratio of 1.22). This TipRanks graph shows how the fund’s measured performance of 60% undercuts the S&P 500 but is an improvement on the average hedge fund’s measured performance of 52%:
Columbus’ investment strategy involves a “disciplined research process” which tries to ascertain the stock’s fundamental value coupled with an analysis of the macro environment such as economic cycles, public policy and politics. The goal of the fund is to achieve risk-adjusted long-term returns through all the phases of the market cycle. It does this by “applying an opportunistic, value-oriented approach to investing and maintaining a focus on capital preservation”. Deep knowledge of companies and industry sectors is then leveraged to make investments in similar industries.
So how does this strategy apply in Q1? Let’s take a closer look:
Valeant Plumped Up
Perhaps surprisingly given Valeant’s recent loss of big-name fund manager Bill Ackman, Eng decided to substantially up the fund’s VRX position by 45% to $11 million. Since the last filing date the shares have actually performed well- and are already up by 16%.
Deutsche Bank analyst Gregg Gilbert is very cautious about the stock’s outlook. He reiterated his hold rating on May 19 with a price target of $18. Gilbert says he is forced to reiterate his hold rating due to long-term uncertainties and challenges surrounding Valeant- including concerns over growth potential, its huge debt and ongoing lawsuits and investigations.
Nonetheless, he is actually fairly positive on the stock’s short-term picture. He is encouraged by increased transparency from management and its commitment to achieving 2017 guidance. Gilbert also believes that the recent refinancing has given Valeant more flexibility. Management are confident that they can reach their goal of paying down $5 billion of debt over the 18 months from last August via the sale of non-core assets. In fact, management has even revealed they would see a core asset like Salix if the offer is high enough. So far Valeant has paid back $3.2 billion, if we include the Dendreon cancer sale announced in January.
Finally, the outlook for Valeant’s key Xifaxan drug has improved following an agreement by Valeant and Teva to stay litigation which, for now, removes the threat of generic competition. The two companies were involved in a patent case but now Teva wants to assess revised bioequivalence guidance from the FDA. As a result, Gilbert is now modelling exclusivity for the IBS-drug until 2024 as a middle-case scenario.
The overall analyst consensus rating on TipRanks is Hold. We can see that in the last three months, the stock has received 2 buy, 9 hold and 3 sell ratings. Analysts are, however, predicting upside for the stock of 42% over the next 12 months from the current $13 share price.
In Q1, Eng initiated a new position in social media giant Facebook. The fund’s $9.94 million FB investment makes up 0.5% of the total portfolio and since the last filing date has already gained 7.1%.
The social media site is constantly evolving. Recently Facebook introduced multiple photo filters in a bid to compete with popular photo-sharing app Snapchat. Now CEO Mark Zuckerberg has turned his attention to video: “I see video as a mega trend, same order as mobile,” said Zuckerberg in February. Indeed, FB already offers live video- a popular but controversial addition given the difficulty of effectively moderating real-time content.
Now new rumors have surfaced that Facebook has signed deals with companies like Vox Media, BuzzFeed, ATTN, Group Nine Media to create shows for its soon-to-be-released video service, sources told Reuters. Ad breaks- a potential serious money maker for FB- will be included in the video service, which will feature noth long and short content. Facebook will own the rights to scripted content of twenty minutes plus but not the shorter, unscripted shows, says Reuters. The longer shows will apparently cost FB $250,000; the shorter shows between $10,000 – $35,000 and 50% of the ad revenue.
It would seem that the Street agrees with Eng’s decision to start investing in this social media stock. FB has a very bullish Strong Buy rating on TipRanks with 31 out of 32 analysts publishing buy ratings on the stock in the last three months. The average analyst price target meanwhile stands at a 13.3% upside from the current share price.
Eng added a serious new position in Alphabe worth $69 million. Alphabet is now the fund’s second biggest stock after Cabot Oil & Gas. Since the last filing date prices are already up in GOOGL by 17%.
Top Deutsche Bank analyst Lloyd Walmsley reviews Google’s recent Market Next Conference. Google has impressive artificial intelligence/ machine learning capabilities to improve ad opportunities says Walmsley, for example, for improving ad response times, quality, targeting and attribution modeling. He saw these developments as improving ad planning, spending and feedback and now feels reassured that GOOGL has its long-term ad business covered.
In particular, Google introduced 20% faster page load time for Ad Words and Optimize, which helps company test different website options utilizing Google’s AI capabilities, and Google Attribution which lets advertisers sees how ads performed on different channels and devices. Walmsley also praised the way Google is now connecting data across its different offerings including YouTube, Gmail and Maps to provide more targeted ads in its ongoing move to encourage users to spend more online rather than offline.
Walmsley has a very impressive 100% success rate on Alphabet and a return per recommendation on the stock of 23.7%. He reiterated his buy rating on May 23 with a price target of $1250 (26% upside).
Based on 26 analyst ratings (of which 25 are a buy), the stock has a Strong Buy consensus outlook. The average analyst price target of $1,056 translates into 6.4% upside for the stock from its current share price.