The Sequoia Fund, Valeant and some other thoughts

By | August 30, 2015

The Sequoia Fund

Most of you are familiar with the Sequoia Fund but here is a brief intro for the uninitiated: when Buffett chose to shut down his partnerships at 1969 he recommended his investors to invest with Bill Ruane, another super investor from Graham-and-Doddslville. Sequoia was actually set up in order to take on Buffett’s former investors. The Sequoia Fund has a very good track record and their writings and transcripts are a great source to learn from. Personally, I really like to read their thoughts on moats, competitive advantages, valuations and growth.

Here is a table with the fund’s performance in recent years:

Sequoia Performance

Sequoia Performance

 

To some investors the 1-2% outperformance over the last 5- and 10-year periods may seem negligible, however, it is anything but. These differences compounded over many years become material. And then, one always has to ask how were these results achieved? Well, Berkshire Hathaway was always a big investment for the fund and Sequoia always carries a significant amount of cash. Most of the businesses they invest with enjoy durable competitive advantages and long-lasting attractive business models. If you read some material about the fund you will see that these are pretty conservative guys that we are talking about, which makes the track record shine even better.

When Sequoia first invested with Valeant (VRX) I was a bit surprised because it seemed not to fit the mould: high leverage, M&A driven business, innovation driven business and so on. Over the years it turned out to be a stroke of genius. Thanks to Valeant’s performance, it’s weight in Sequoia’s portfolio has ballooned to almost 29% of the fund:

Sequoia Portfolio

Sequoia Portfolio

In the last investor day, there were plenty of questions about Valeant which is going to be the topic of most of the rest of this post. Here is a link to the investor day transcript, I highly recommend you to read it, it will make you a bit smarter than you were before reading this PDF. (past transcripts can be found here).

Valeant Pharmaceuticals International, Inc. (VRX)

Before I delve into this I’ll make a disclosure: neither I nor Eden has/had a position with Valeant. My interest in the company is purely out of intellectual curiosity and it is highly unlikely that I/Eden will ever go either long or short on this company.

I’ll be lazy and instead of writing about the company, I will just paste a nice company background that was written by the writer at the great blog AZ Value Investing:

Valeant Background

Valeant Background

Over the years, Valeant has generated great returns for it’s investors. It is ran as an M&A platform with allegedly brilliant capital allocation and target selection of the it’s CEO, Mike Pearson. Just see how many times is the name “Mike Pearson” mentioned in Sequoia’s latest transcript to understand how important he is.

Such M&A platforms tend to be very complicated to value. Recently, there has been constant buzz in the blogosphere about Valeant’s lack of disclosure and some bloggers even claim, and have some data to substantiate their claims, that Valeant is fraud. Even Charlie Munger said  that it is worse than Geneen’s ITT. To put it in Munger’s words: “Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time.”

Overcomplexity usually makes me shun away from investing in companies that exhibit this feature, especially in cases like this where I’m pretty ignorant about the basic unit economics of the various drugs that Valeant makes.

Two fantastic blog posts about Valeant with some interesting data can be found on AZ Value Investing, here the link to part I of his post series about Valeant: http://azvalue.blogspot.sg/2015/08/valeant-detailed-look-inside-dangerous.html I won’t replicate the discussion, but this blogger has some serious claims and facts to back it up. If you have any interest in VRX, you must read those posts and see if you can refute this blogger’s claims and accusations.

When I read his posts I couldn’t stop thinking of another McKinsey alumnus who built a platform that generated excellent returns to investors through a very innovative business model–Jeff Skilling.

Then a thought occurred to me: Squoia is well-known for it’s diligent research capabilities and the people there usually don’t leave any stone unturned. Could they be missing what an internet blogger found? could they be misled? I think that all options are on the table and the jury is still out of this one. I will be watching that drama from the sidelines.

Enjoy the show!

Yaniv

5 thoughts on “The Sequoia Fund, Valeant and some other thoughts

  1. Avital

    There’s another Mckinsey alumnus who built a platform that generated excellent returns to investors through a very innovative business model – John Malone. I guess that he had many many critics back then (no earnings, high sebt, EBITDA?)

    Reply
    1. Yaniv Uliel Post author

      Avital, good call. Dr. Malone is one of my favorites and I have great interest in some of the companies that he is controlling. He is the subject of a few posts in this blog…
      In my humble opinion, Malone is not nearly as promotional as Valeant’s Pearson. Pearson’s efforts to promote Valeant as a great investment make me wary. Malone did exactly the opposite as he wanted the price of his shares to be depressed so that he can buy back at a good price.

      Reply
      1. Avital

        I don’t know how you can mesure or calculate promotional activity. John Malone is not a CEO for more then a decade, and his current companies has investor & analyst days, the CEO’s are speaking at industry conferences or quarterly results, and they make persentations with adjusted numbers. That’s the standard in our days, and The “libertyies” aren’t different.

        And regarding Mr Malone promotional activity, just to quote from an interview in 2009 –

        DBJ: How hard was it to get Wall Street to adopt that view?
        Malone: It was not easy. It was almost like building one brick at a time. We found one institutional investor at a time who would hear that and start to believe it. Slowly, over time, that became the metric. I can still remember Comcast, which was much smaller than we were at that time, at a conference. I kept kidding (Comcast co-founder) Julian Brodsky, “Listen, Julian, it’s not about earnings, it’s about wealth creation and levered cash-flow growth. Tell them you don’t care about earnings.”
        Source: http://www.bizjournals.com/denver/stories/2009/04/20/daily97.html?page=all

        That’s promotional acitivty, and I don’t think Malone cares about the share price: If it was high he issued shares, If they were low, he bought them back, exactly the same way his companies are doing today. And Mr Pearson is probably not different in the long-run (although at the moment he issued more shares then did buy backs so he needs to prove himself on that issue)

        Reply
  2. Yaniv Uliel Post author

    Seems like I’m not the only one to whom this reminds of Enron, an article was published in the Financial Times’ LEX section titled “Valeant: smartest guys in the room” those who read it, know that “The smartest guys in the room” is the name of the book that tells the Enron story.

    Bronte followed up with another great investigative post about Valeant: http://brontecapital.blogspot.sg/2015/10/some-comments-on-valeant-conference-call.html
    and the stock trades much lower now than it did when I first posted this.

    Valeant schedule a conference call to discuss recent events later that month. For sure, this is going to be interesting.

    Reply

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