Paul Tudor Jones Loves Pharma Spinoffs

 | May 29, 2013 | 3:00 PM EDT
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Each quarter, hedge funds, such as Tudor Investment Group, which is run by billionaire Paul Tudor Jones, file 13Fs with the Securities and Exchange Commission, disclosing many of their top equity positions. Tudor Jones has had an active first quarter, initiating more than 300 new equity positions and selling out of nearly 400. A substantial part of his fund's equity holdings for the first quarter of 2013 was in healthcare-related stocks. An examination of the three largest healthcare equity holdings in the fund's 13F reveals that he has a love of spinoffs, past and future.

The fund's biggest healthcare holding is the pharmaceutical giant Pfizer (PFE); the fund's 13F reports holdings of 1,827,050 shares, valued at about $52.7 million. This constitutes nearly 4% of the fund's reported equity holdings, the second-largest stake overall.

Pfizer is a new holding for the fund, initiated during the first quarter, and it has been volatile stock this year. Its price touched the 52-week high of $31.15 in April before falling back to around $29 as of the time of this writing. Pfizer reported diluted earnings per share of $0.38 for the first quarter of 2013, compared with $0.24 for the corresponding quarter of the prior year, a 58% rise.

Trading below 13x year-ahead EPS estimates, Pfizer is a quintessential GARP (growth at a reasonable price) play, and a spinoff of Zoetis will reward shareholders as well. According to one analyst, Pfizer's efforts to sell its remaining stake in Zoetis gives existing shareholders preference "to buy Zoetis shares at a 7% discount to the market price of shares." It's difficult to ignore the value, and Tudor Jones has it squarely in his sights.

The hedgie's next-largest healthcare holding in terms of value is the drug manufacturer AbbVie (ABBV). The fund disclosed a holding of 800,000 shares worth about $32.6 million as of March 31 -- a substantial rise from the 250,000 shares held at the end of December 2012. AbbVie, a spinoff of Abbott Laboratories (ABT), is the fourth-largest equity holding for the fund, and it accounted for 2.4% of the total first-quarter 13F.

AbbVie has had an impressive 2013 so far, rallying from a low of $32.51 in December 2012 to $43.95 as of this writing -- its 52-week high is $47.10. Its first-quarter profit was $968 million, or $0.60 a share, up from $883 million, or $0.56 a share, from the corresponding quarter of the prior year. At an earnings multiple below 14, AbbVie is another GARP play, and shares also sport the fifth-highest dividend yield in the major drug manufacturers' industry, at 3.5%.

The third-largest healthcare-related stock in the fund's equity portfolio is Covidien (COV), the fifth-largest holding overall. Tudor Jones was very bullish on Covidien during the quarter, increasing his small stake of around 5,000 shares, as of the end of 2012, to 380,400 shares as of March 31. Covidien has experienced a volatile 2013, but it currently sits at around $66 a share, very close to its 52-week high. Second-quarter 2013 adjusted diluted earnings per share, excluding certain items, was $1.12, compared with $1.05 diluted EPS from the corresponding quarter of the prior year.

Wall Street expects shares to bounce 10% higher from current levels, and an upcoming sale or spinoff of Mallinckrodt may be why Tudor Jones is watching this stock closely. In the past week, Covidien has announced that after the sale of its pharmaceuticals business to St. Louis-based Mallinckrodt is completed this summer, shareholders will receive shares of the "new" publicly-traded Mallinckrodt in an 8:1 exchange (eight shares of Mallinckrodt for every Covidien share).

Covidien has estimated that the Mallinckrodt spinoff will generate sales growth of 7% to 11% in its fiscal year ending this September, and first-quarter revenue was up 13% year over year. In addition to the typical array of post-split synergies that excite investors, the new Mallinckrodt's recent purchases of CNS Therapeutics (producer of Gablofen) and Xanodyne Pharmaceuticals' Roxicodone are net positives in the intermediate to long term.

Early estimates also predict strong growth from Mallinckrodt's generics business, though we'll have to wait until the end of this fiscal year to see the entire picture. Still, it's easy to understand why Tudor Jones is bullish on Covidien and, likely, its subsequent spinoff.

During the quarter, Tudor Jones has weighted much of his equity portfolio toward spinoff-related healthcare plays, so this top trio is worth researching.

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