The Sequoia Fund is a mutual fund founded by William Ruane in 1970. Both Ruane and Warren Buffett took a class from Benjamin Graham, the father of value investing, in 1951. When Buffett wound down his original partnership he recommended Ruane’s newly formed Sequoia Fund exclusively to all of his partners. The fund has performed extremely well over the years, and currently has a 5-star rating from Morningstar. In Buffett’s famous essay The Super Investors of Graham-And-Doddsville regarding the success of value investing, the Sequoia fund is listed as one of the prime examples. $10,000 invested in 1970 would be worth $2.89 million at the end of 2012, an annualized gain of 14.8%.
A good investor should always be on the lookout for new ideas. A great place to look for those ideas is the portfolio of a fund such as Sequoia. Sequoia had 44 positions at the end of 2012, but the ten largest positions represented 65% of common stock investments. Let’s take a look at the three largest holdings.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX)
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) makes up 11.6% of Sequoia’s holdings and had returned 28% for the fund by the end of 2012. The stock price has actually risen another 17% in 2013, meaning that the total return is now significantly higher. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a small pharmaceutical company, with $3.5 billion of revenue in 2012. Over the past 5 years revenue has grown at an annualized rate of 47% as the company has grown both organically and through acquisitions. In 2011 Valeant Pharmaceuticals Intl Inc (NYSE:VRX) spent a staggering $2.4 billion on acquisitions, followed by $3.4 billion in 2012. Quite a bit of debt was taken out to fund all of this, as the company went from no debt in 2008 to about $11 billion in debt at the end of 2012.
In Sequoia’s annual report the fund expects these acquisitions to provide substantial earnings accretion. Written before Valeant Pharmaceuticals Intl Inc (NYSE:VRX) reported full-year figures, the fund expected cash earnings to be about $4 per share in 2012, and significantly more in 2013. While EPS came in at $-0.38 for the year, this is not what they mean by cash earnings. They most likely are referring to owner earnings, a phrase coined by Warren Buffett.