Below we take a look at Disney (DIS) and 4 Other Stocks Billionaire Phill Gross Was Buying Up in Q1. For our methodology and a more comprehensive list of stocks that were on the billionaire money manager’s wish list in the first quarter, please see Disney (DIS) and 9 Other Stocks Billionaire Phill Gross Was Buying Up in Q1.
5. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)
Value of Adage Capital Management’s 13F Position: $207 million
Number of Hedge Fund Shareholders: 49
Hedge funds have been unloading Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) in droves in recent quarters, with a net total of 31% of Q1 2021 shareholders having sold out of the stock a year later. Phill Gross’ Adage Capital Management has bucked that trend however, more than tripling its stake in Vertez during Q1 to 793,290 shares.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) shares have gained 29% this year and 44% over the past 12 months thanks to the biotechnology company’s strong and growing pipeline of treatments. Vertex currently dominates the cystic fibrosis space, having the only approved drugs on the U.S and European markets and with very little competition in its rear view mirror. The patents for Trikafta/Kaftrio, its bestselling CF drug, won’t expire for another 15 years. In addition to some of its other key drugs like Orkambi, Kalydeco, Symdeko, the company is developing novel treatments that target everything from acute pain to Type 1 Diabetes.
Tweedy Browne Company loves the pricing power that Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has in the cystic fibrosis space and believes its strength in that domain will allow the company to develop even better treatments and build a stronger and more diverse portfolio, as detailed in the fund’s Q4 2021 investor letter:
“Portfolio activity during the quarter was relatively modest, and mostly on the sell side, taking advantage of the market’s advance to trim or sell positions that were trading at or above our estimates of their underlying intrinsic values. In terms of newly established positions, there were only two, (including) Vertex Pharmaceutical, a US-based pharma company specializing in therapies for cystic fibrosis (Value Fund). Both of these companies at purchase were trading at substantial discounts from our estimates of their underlying intrinsic values, and, in our view, are financially strong and well positioned for future growth.
Vertex Pharmaceutical, which was purchased by the Tweedy, Browne Value Fund in mid-November 2021, is a biotechnology company that specializes in rare diseases/orphan drugs. The company’s current strength is in the treatment of cystic fibrosis, where its therapies are the gold standard of care globally. Analysts expect that Vertex will be able to maintain its dominant position in the treatment of this disease, which afflicts 83,000 people worldwide, largely due to the effectiveness of its therapies, the fact that patent expirations for its drugs are a long way off into the future (2030-2037), and the lack of effective competition. This affords Vertex pricing power for its drugs, as there are currently no good alternative therapies. Assuming the company receives complete international and pediatric approvals, Vertex’s portfolio of approved drugs would be eligible to treat 90% of the people who have this disease.
Vertex’s therapies are also not one and done drugs, but rather start in early childhood and continue throughout the patient’s lifetime. The company’s strong cash flow, in our view, should support the company’s development of even better next generation drugs to treat cystic fibrosis as well as diversify its drug pipeline to treat other rare diseases. However, many of these treatments are on the horizon or are in their incipient stages of development.
In the quarter just prior to the Fund’s initial purchase of Vertex, knowledgeable insiders, including the company’s CEO and its lead independent director, purchased millions of dollars of the company’s stock at prices higher than we paid for the Fund’s shares. The company itself also repurchased approximately $642 million worth of its shares in the 3rd quarter at or around the same prices paid by the CEO and lead director ($195 per share). We estimate the company’s underlying intrinsic value to be in the range of $240 to $250 per share, and we believe that estimate is well supported by current, here-and-now cash flow, operating income and earnings per share. Morningstar and Goldman Sachs have valued the company at substantially higher prices than our estimate of $240 – $250 per share. The Fund’s weighted average cost in the stock is $187. At initial purchase, the company was trading at approximately 14 times current earnings, and 9.9 times enterprise value to earnings before interest and taxes.”
4. Nutrien Ltd. (NYSE:NTR)
Value of Adage Capital Management’s 13F Position: $213 million
Number of Hedge Fund Shareholders: 61
Hedge funds were going crazy over Nutrien Ltd. (NYSE:NTR) shares in Q1, as there was a 61% surge in hedge fund ownership of the company. Adage Capital Management was already a shareholder, but further raised the size of its long position in NTR by 20% to 2.05 million shares during the March quarter.
Nutrien Ltd. (NYSE:NTR) had a record quarter in Q1, earning $1.4 billion even as the potash producer is unable to keep up with the surging demand that’s been triggered by Russia’s removal from the global potash stage. In response, Nutrien plans to grow potash production to 18 million tonnes by 2025, which represents a 40% increase over the Canadian company’s 2020 production.
Nutrien Ltd. (NYSE:NTR) can accomplish that boost thanks to having the largest low-cost capacity in the industry. The company is also exploring further opportunities to expand its low-cost potash production capabilities that would fuel further growth beyond 2025. The company recently announced that it will also buy back an additional $2 billion of its shares this year thanks to its strong expected cash flow, resulting in close to $5 billion in capital being returned to shareholders in 2022.
3. Walt Disney Co (NYSE:DIS)
Value of Adage Capital Management’s 13F Position: $261 million
Number of Hedge Fund Shareholders: 115
Hedge fund ownership of Walt Disney Co (NYSE:DIS) has dropped by 21% since hitting an all-time high at the end of 2020, thanks in part to concerns about Disney+’s declining subscriber numbers, as well as the company’s controversial and damaging stand against a parental rights bill in Florida. Adage Capital Management added 20% more Disney shares to its position during Q1, lifting the size of it to 1.9 million.
A recent report from Media Partners Asia suggests Walt Disney Co (NYSE:DIS) could lose as many as 20 million subscribers after being outbid for, of all things, its rights to Indian Premier League cricket matches. Close to 50 million of Disney+’s subscribers are based in India and several other Southeast Asian countries, where cricket is extremely popular and has been a huge subscriber growth driver. Yet, the company’s streaming service in those regions, Disney+ Hotstar, also pulls in less than 1/10th the average monthly revenue per subscriber that its U.S service does, at just $0.76.
The Harding Loevner Global Equity Fund is one of several that have exited Walt Disney Co (NYSE:DIS) in recent quarters, citing the capital intensiveness of its business and broader streaming declines as some of the reasons for doing so in its Q1 2022 investor letter:
“The war in Ukraine has given new urgency to the question of whether globalization has reached a tipping point and if the familiar web of decentralized, just-in-time, global supply chains will be a casualty of the inward turn dividing countries into competing trading blocs. It is probably too soon to know. We sold Disney (NYSE:DIS), due to some concerns about the increasing capital intensity of its business amid signs of rising competition and slowing growth in streaming media consumption.”
2. Burlington Stores Inc (NYSE:BURL)
Value of Adage Capital Management’s 13F Position: $424 million
Number of Hedge Fund Shareholders: 38
Hedge fund ownership of Burlington Stores Inc (NYSE:BURL) remains around historical norms, though down by 17% since peaking in the third quarter of 2021. Adage Capital Management made a big investment in the company during the first quarter, building a BURL position that was 51% larger at the end of March than the one the fund held at the end of December.
Burlington Stores Inc (NYSE:BURL) had a disappointing Q1, widely missing both revenue and EPS estimates for the quarter. The off-price retailer earned $0.54 per share, missing estimates by $0.11, while its $1.93 billion in revenue was $120 million short of expectations. The second quarter isn’t shaping up to be much better, as Burlington Stores is guiding for just $0.18 to $0.31 in adjusted EPS compared to $1.50 in GAAP EPS a year earlier.
Cowen recently downgraded Burlington Stores Inc (NYSE:BURL) to ‘Market Perform’ from ‘Outperform’, while lowering its price target on the stock to $175 from $209. Even with shares off their peak by 50%, Cowen doesn’t believe they are “cheap enough to defend”, given that inflation is having an outsized impact on the company’s core low income consumers.
1. Dollar Tree, Inc. (NASDAQ:DLTR)
Value of Adage Capital Management’s 13F Position: $549 million
Number of Hedge Fund Shareholders: 41
Topping the list is Dollar Tree, Inc. (NASDAQ:DLTR), which Adage Capital Management owns 3.43 million shares of as of March 31, a 68% increase from a quarter earlier. Other hedge funds appear to have sold out of Dollar Tree too early, as ownership of the stock has fallen by 31% since mid-2020 while shares have soared by more than 60% during that time.
Phill Gross appears to be bullish on discount retailers like Dollar Tree, Inc. (NASDAQ:DLTR) and Burlington Stores given the challenging economic environment. Unlike the latter, Dollar Tree had a strong first quarter that sent shares surging by 29% between May 20 and May 27. Same-store sales grew by 4.4% year-over-year during the quarter, while margins remained strong despite rising freight costs.
Several of Dollar Tree, Inc. (NASDAQ:DLTR)’s pricing initiatives have had a positive impact on traffic and sales, namely the introduction of a $1.25 price point, which allowed the company to reintroduce several popular products that had been discontinued due to their previous $1.00 pricing constraint. On the upper end, Dollar Tree is also expanding the assortment of items it sells for between $3 and $5, which boosted revenue and margins.
Dollar Tree raised its 2022 guidance following its strong Q1, with the company now anticipating between $27.76 billion and $28.14 billion in consolidated net sales for the year, as well as earnings of between $7.80 and $8.20 per share.
For more on the latest trading activity made by some of the biggest hedge fund managers and investors in the world, check out why Investors are Watching These 10 Biotech Stocks and why Jim Cramer Recommends These 10 Stocks for Recession.
Disclosure: None.
