Canada’s health-care sector posted a loss of 45.7 per cent in October, with most of that coming from Valeant Pharmaceuticals International, which was down 49.2 per cent.Ryan Remiorz/The Canadian Press
To better understand what Canadian investing professionals are buying and selling and why, we canvass the buy side for the rationale behind their recent investment decisions. Here are three money managers on what they have been trading.
The pro: Jerome Hass, partner at Lightwater Partners
The trade: Valeant Pharmaceuticals International Inc. (VRX-T) (covered short)
Like many of Valeant's critics, Mr. Hass took an unfavourable view of the company's aggressive, debt-fuelled, growth-by-acquisition strategy. But betting against Valeant has historically been a risky move.
"We've been watching it for a long time. But shorting this stock would have been like stepping in front of a freight train," he said.
From the end of the 2012 to this past May, Valeant shares rose fivefold to beyond the $300-per-share mark. The stock became a must-own for Canadian fund managers trying to avoid underperforming the S&P/TSX composite index, with enough momentum to scare away many potential short sellers.
But after the company closed its $11-billion (U.S.) purchase of Salix Pharmaceuticals in April, Valeant's debt burden reached the peak of investor tolerance, Mr. Hass said. Furthermore, the company's tax strategies came under the scrutiny of the U.S. Senate last summer.
Having the justification he needed, Mr. Hass established a short position in late June at about $278 (Canadian).
Since late September, Valeant's stock has been gripped by accusations about the company's drug pricing, its disclosure and its relationship with a mail-order pharmacy. The stock has declined by more than 70 per cent from its peak.
Mr. Hass covered his short position on Oct. 23 at about $150.
The pro: Barry Schwartz, chief investment officer, Baskin Wealth Management
The trade: CVS Health Corp. (CVS-N) (purchase)
Since Loblaw Cos. Ltd. took over Shoppers Drug Mart Corp. in 2014, Mr. Schwartz said he has been looking to replace that lost exposure to the North American pharmacy space.
"In our portfolio, we miss Shoppers Drug Mart very much. We've been patiently waiting for a pullback on CVS or Walgreens," he said.
CVS complied first. The stock declined considerably through August and September over reduced earnings guidance for 2016. The sell-off in retail stocks, health-care stocks, and stocks in general in recent weeks has put further pressure on CVS shares.
The company generates a large amount of free cash flow, much of which is returned to shareholders, Mr. Schwartz said. And the pending takeover of Rite Aid Corp. by Walgreens Boots Alliance Inc. essentially makes the U.S. pharmacy industry a pending duopoly.
The pullback in CVS shares has also reduced the stock's forward price-to-earnings ratio to about 16 times. Mr. Schwartz established a position in May at about $100 (U.S.) per share, and has been accumulating shares on recent days' weakness.
"It's a good business at a reasonable price," he said. "It's an anti-Valeant."
The pro: Derek Warren, portfolio manager, Lincluden Investment Management
The trade: H&R REIT (HR.UN-T) (purchase)
The prospect of the U.S. Federal Reserve's first rate hike in a decade has loomed over the REIT space for months now.
"It's been one of those years where I feel like I've been dragged behind a pickup truck," Mr. Warren said.
H&R REIT is no exception – its shares have declined by 18 per cent since peaking in February. A rising interest rate environment is seen as negative for REIT stocks, which investors tend to favour when yields are low.
But the timing of the Fed's eventual first hike matters less for REITs like H&R, Mr. Warren said. "The average term of their leases is so long, and their debt is termed out for such a long period, these short-term concerns are just providing [a buying] opportunity."
H&R offers a bit of a safety net through its diversified portfolio, higher-than-average quality properties, solid balance sheet and exposure to the U.S. market, he said.
He started buying shares of H&R on Oct. 5, and accumulated a position over a number of days at an average price of $21.19, he said.
Investors interested in H&R might want to consider the likelihood of further weakness, however, once the Fed does raise its federal funds rate, which the balance of opinion is currently expecting next month.
"It doesn't take long for people to realize there's an opportunity," Mr. Warren said. "I think [weakness in H&R is] going to be sudden and brief."
Tim Shufelt