Betting on a Hedge-Fund Favorite

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was a mixed week for markets last week, with the Dow Jones down 0.30%, the S&P 500 losing 0.15% and the NASDAQ eking out a 0.10% gain. The MCSI Emerging Markets Index recovered 1.11%.

Your position in ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) rose 1.31%.

As I expected, U.S. stock indexes have rebounded nicely off of their Aug. 24 lows. Still, the market’s reaction to the Fed’s decision to hold the line on interest rates was negative with some market watchers suggesting it signaled a lack of confidence in the economy. As I have noted, I expect markets to remain choppy, at least until the end of October, when the strong period of seasonality kicks in.

This week’s Bull Market Alert recommendation focuses on Canadian specialty drug maker Valeant Pharmaceuticals International (VRX).

Valeant has grown like a weed, acquiring more than 100 companies in the last seven years. Most recently, Valeant agreed to pay $1 billion for Sprout Pharmaceuticals, two days after Sprout’s Addyi received FDA approval. Dubbed the “Viagra for women,” many analysts view Addyi as a potential blockbuster sales drug.

There is no doubt Valeant is a rapidly growing company. Revenues rose by 33.9% over the past year, compared with the industry average of 6.7%. Net operating cash flow has slightly increased to $410.50 million, or 9.17%, when compared to the same quarter last year. During the past fiscal year, Valeant earned $2.67 a share versus losing $2.62 a share in the prior year. This year, the market expects earnings to soar to $11.63 a share.

Although they are still off 8.13% from their all-time highs, shares of Valeant have already delivered a whopping return of 70.95% year-to-date.

No wonder a wide range of hedge-fund managers are betting on Valeant. Bill Ackman’s Pershing Square held 19.47 million shares of Valeant Pharmaceuticals International as of the end of June. That’s a holding valued at $4.7 billion — just about 30% of Ackman’s fund. Other hedge-fund managers betting big on Valeant include Kyle Bass, Ken Fisher, Steven Cohen and George Soros. Throw in the fact that insiders have been buying the stock over the last few months, and you see that a lot of smart money is betting on Valeant.

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So buy Valeant Pharmaceuticals International, Inc. (VRX) at market today and place your initial stop at $198.00.

After last week’s move up, I’ll be recommending options on this position once the stock settles.

Portfolio Update

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) rose 1.31%. As of last week, 15 analysts are currently providing coverage on ULTA. Specifically, 10 analysts rate ULTA as a “Strong Buy,” one lists it as a “Buy” and four call it a “Hold.” ULTA is trading above its 50-day moving average and is a BUY.

Alaska Air (ALK) fell 3.82%. Barclays raised its price target on ALK from $80 to $90 last week. This higher target represents a potential 14% move upwards from last Friday’s close. Barclays cited the continued weakness in oil prices as a positive tailwind (pardon the airline pun), as fuel prices have dropped 10% just since July. ALK is a BUY.

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