Superinvestors like Warren Buffett and George Soros are closely watched figures within the investment community for a very good reason: they have a knack for consistently beating the broader markets. Soros, for instance, has averaged annual returns in excess of 30% for stretches longer than a decade during his career. Major stock market indices like the S&P 500, by contrast, have historically averaged only about 10% in annual gains.
At the end of the third quarter, lay investors finally learned what these investing behemoths have been buying over the last three months via their 13F filings with the SEC. Per the filings for the Soros Fund Managment, we can see that the fund has become increasingly bearish in its outlook, with nearly 65% of its transactions consisting of sales in the third-quarter.
Even so, Soros' fund did make some noteworthy buys during the quarter, especially in health care. Namely, the fund opened or increased positions in the drugmakers AbbVie (NYSE:ABBV), Actavis plc (NYSE:AGN), and Valeant Pharmaceuticals International, (NYSE:BHC). Given this billionaire's track record of beating the broader markets, I think it's worthwhile to consider whether or not to follow his lead into these three top health care names.
AbbVie looks like a compelling buy
AbbVie's stock has already risen over 30% this year, and is now breaking through its all-time highs in recent sessions. The stock's stellar year is due, at least partly, to a rising interest among institutional investors. Besides the Soros Fund, a number of top flight funds snapped up shares in the third-quarter, causing institutional ownership to rise to a healthy 80%.
Even after this meteroric rise, though, AbbVie still looks, to me, like a buy. Sales of the company's anti-inflammatory drug Humira should continue to post double-digit sales growth in 2015, and AbbVie's triple-therapy hepatitis C regimen is expected to launch in the first-quarter of next year. With a forward-price to earnings ratio currently pegged at 15.5, AbbVie's shares look comparatively cheap. The downside is that Humira will come off of patent protection in 2016, which could put the brakes on AbbVie's growth in the not-so distant future.
Actavis has been soaring, fueled by an acquisition bonanza
Perhaps no name has been as active in the merger and acquisition arena over the last two years as Actavis plc. After buying Dublin-based Warner-Chilcott in 2013, the company has become a serial acquirer of branded drugmakers, culminating in the $66 billion buyout of Botox maker Allergan (UNKNOWN:AGN.DL) last week.
What's key to understand is that Soros entered Actavis prior to this megamerger, when the underlying story was radically different. Following this buyout, I think Actavis is no longer a strong buy because it overpaid for Allergan in its bid to ward off Valeant. My hunch (and it's only a hunch) is that this potential misstep on the M&A front will dampen Actavis' burgeoning growth story. Time will tell if I'm correct.
Valeant looks cheap; its next move is critical to watch
Like Actavis, Valeant's growth story centers around buying rival drugmakers and subsequently increasing profit margins to unlock latent value. As it stands right now, Valeant's shares are trading at a reasonable forward price-to-earnings ratio of 14.3, and diluted EPS is expected to grow by an average of 26% over the next 5 years. According to the company's third-quarter earnings report, most of this growth should come from its acquisition of Bausch & Lomb, which is presently on track to generate 12% in annual sales growth this year.
Before buying Valeant's growth metrics, though, you may want to wait to see what their next move will be after losing Allergan to Actavis. My take is that Valeant is probably on the lookout for another major deal that could dramatically alter the pros and cons of investing in this drugmaker. The good news is that Valeant's management didn't get into a bidding war with Actavis, suggesting that the company is seeking deals that offer a certain level of immediate upside to shareholders. In short, I think Valeant is worth watching, but it's not quite time to buy.
The best of the bunch
Taking a cursory look at the activity of elite investors can be a good starting point when sussing out potential opportunities in the stock market. By the same token, you should always remember that these filings are out of date by the time they reach the public domain. When digging into these three buys by the Soros Fund, AbbVie looks like the only clear-cut buy at present, because the investing thesis for both Actavis and Valeant has fundamentally changed.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.