#$shpg

Here are some of the stocks the Yahoo Finance team will be tracking for you today.

Amazon (AMZN) hit a fresh all-time high this morning. The e-commerce giant is hosting its second annual Prime Day event today. The 24-hour sale offers more than 100,000 deals to prime members.

Alcoa (AA) shares were sharply higher in early trading after it reported better-than-expected earnings and revenue for the second quarter. Even though weak aluminum prices continued to drag earnings and revenue lower from a year ago, Alcoa’s bottom line benefitted from cost cutting and productivity increases. The company also said its plans to split into two separate companies later this year remain on track.

Xerox (XRX) and R.R. Donnelley (RRD) are in focus following a Bloomberg report that the two companies are in talks to merge their copier businesses. This comes after Xerox announced earlier this year that it will split into two publicly traded companies—one selling and managing office equipment and the other providing office services.

Shire’s (SHPG) U.S.-listed shares soared after the Food and Drug Administration approved its eye drops for treating dry eye disease. The solution is expected to go on sale in the third quarter and analysts estimate it could generate $1 billion a year in sales.

By Tabi Hussain

We talked about Bill Ackman’s Pershing Square and its terribly bad quarter in a previous post. The list of hedge funds which have been burned by Valeant Pharmaceuticals is, however, much longer. Valeant was also instrumental in crippling the returns of Lone Pine Capital’s hedge funds.

Also see a great curated list of hedge fund letters

Lone Pine’s Cypress suffered a net loss of 8%, whereas Lone Kauri, Lone Tamarack and Lone Cascade were down 7.9%, 7.1% and 4.5%, respectively. Lone Cascade is a long-only investment vehicle. Last year Lone Cypress was up 8.7%, a gain which has been wiped out by the losses incurred in the first quarter of this year, according to a letter to investors reviewed by ValueWalk.

Lone Pine gets hit in its long portfolio

According to 13F filings, Lone Pine Capital held 5.8 million shares of Valeant through the end of last year. Other hedge funds which took a hit from Valeant’s troubles include Paulson & Co., Viking Global Investors, Jana Partners and Coatue Management. It is highly likely that some of these funds unloaded their Valeant burden in the last quarter.

Also see

Valeant Pharmaceuticals: How We Knew It Would Blow Up Salomon Brothers and Valeant

Livermore Partners Huge Gain On Valeant (VRX) Short Valeant contributed -6.3% to Sequoia’s return of -7.3% Valeant Pharmaceuticals Trading Halted On News Valeant (VRX) Crashes: Ackman Sends Letter … Bill Ackman 2015 letter to investors: Hurt By Valeant, Herbalife Sequoia Fund Stung By Valeant Shakes Up Management ValueAct Falls 2.2% In 2015; Still Likes Valeant Wally Weitz: Valuable Losses At Valeant Pharma

The Energy sector has also humbled many bigwigs of the hedge fund industry. We mentioned the under-performance of Carlson Capital’s Black Diamond Energy Fund. The Energy sector’s consolidation was hurt when it was thrown into a frenzy by a multitude of factors. Rumors of Chesapeake Energy’s bankruptcy, the uncovering of shorts which caused a significant short squeeze in the Energy sector, and confusion around Energy Transfer Equity’d merger with Williams Companies fueled the volatility.

Lone Pine held 28.9 million shares of Williams Companies at the end of 2015. The fund has mentioned its bullish view on the Energy Transfer and Williams merger, however, this was one of the fund’s underperforming longs in the first quarter. Williams’ stock is down 23% YTD as fresh tax issues make the ETE/WMB merger more difficult.

Tech sector is undervalued

Some of the largest stakes held by the hedge fund are in web-based companies. The managers believe these internet giants have tremendous worth and are undervalued at current prices. The firm’s management commented in their letter that the market has not priced in the entrepreneurial value of these companies and discounts their cash-generating ability as well. The major tiger cubs follow a consistent investment style, as funds like Blue Ridge Capital, Viking Global and Coatue Management have large investments in the technology sector.

Lone Pine’s short bets in consumer sectors

Lone Pine has done well in the short portfolio it holds in Europe. The fund looks to short companies that are negatively affected by the technology boom. One of Lone Pine’s bearish bets is Next. The position turned profitable as the stock slumped towards the end of March, shedding 26% in Q1. Marks and Spencer Group’s shares were down 10%, benefiting Lone Pine’s 0.9% short position in the company.

One short bet in the clothing industry was not as profitable. Burberry Group gained 14% in the first quarter, hurting Lone Pine’s 1.7% position. Tesco, where the tiger cub has a 1.26% short, has been up 28% in the past quarter. Tesco has a food retail and retail banking business. In order to manage risk, Lone Pine is reducing gross exposure in its portfolio, said the Q1 letter.

Lone Pine Capital management thinks companies like Shire, Charter Communications and Dollar Tree have the ability to enhance their own value as they acquire businesses they can turnaround. For example, Shire is close to buying U.S.-based specialty drug company Baxalta in a $32 billion deal. Similarly, Charter Communications has moved to buy Time Warner Cable and Bright Circuits Network.

Lone Pine’s letter also said that the wave of electronic payment systems is going to benefit its positions in PayPal, Fleetcor and other similar companies.

Equity market is better investment than fixed income

The quarterly letter comments on the “anti-business” policies that are being discussed in political circles as well. It is possible that Lone Pine is referring to the stricter tax regulations that are creating difficulties for M&A activity across industries. The fund managers also think that with the lower interest rates, fixed income investments don’t seem attractive and holding equities is the only investible option.

The managers also spread some hope around in the quarterly letter, saying that fast access to information and news makes it appear as if only bad things are happening. However, the quality of life for an average person has improved, so conditions are not as bad.

The quarterly letter also announced the appointment of a new equity analyst, Joan Payson, who will join Lone Pine’s team to analyze investments in the consumer sector.

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This guy is bad news for Valeant and other drug companies.

With yesterday’s 300-point collapse, the Dow is now down 7.3 percent since January 1st. Other indexes have cratered as well. The smaller company Russell 2000 has shed over 11 percent.  In the midst of this carnage, investors are understandably searching for “safe haven” stocks that generate dividends, are inexpensive, and offer less volatility than the overall market. Unfortunately, these ports in the storm are few and far between at the moment. People are looking for any excuse to sell stocks right now, which means anyone looking to buy has to be particularly sensitive to headline risk.

Today no sector faces greater headline risk than the biotechnology and pharmaceutical space, especially companies that have engaged in price gouging. In this toxic environment, names like Valeant, Shire, Vertex, BioMarin, and others are the financial equivalent of the Zika virus.

On Thursday, the House Committee on Oversight and Government Reform will hold hearings to investigate exorbitant drug price increases. The committee’s ranking Democrat, Maryland Congressman Elijah Cummings, and other committee members will grill Valeant’s interim CEO Howard Schiller. The management of Turing Pharma--which first made headlines last fall for astronomically jacking up prices on an obscure but important medicine--will also be questioned. News outlets will broadcast the hearings far and wide, and company stocks could very well drop, some precipitously, as negative sound bytes make their way through the media.

Politicians will take every opportunity to exacerbate this negative publicity. The presidential campaign is just starting to heat up and nothing gets attention like exposing corporate greed. At a recent town hall Hillary Clinton read a note about a Valeant migraine medication that cost 356 percent more than it did a year earlier. Hillary did not mince words. “This is predatory pricing, it is unjustified, it is wrong,” she said, adding, “I’m going after them, we are going to stop this.”

Guess what?  Hillary is right. I’ve made no secret about my disgust for Valeant’s now publicized “buy and burn” strategy of acquiring smaller drug companies and axing research and development spending while ripping prices higher. Since Clinton first raised the issue of drug prices back in September, Valeant has garnered more bad press for its secret use of specialty pharmacies. The company’s sales force instructed doctors to get patients to buy Valeant drugs from those pharmacies so that the ultimate payer--either a for profit insurer or Medicaid and Medicare—would be coerced to pay for high priced Valeant drugs even when less expensive and equally efficacious alternatives existed.

What has disgusted me even more than Valeant’s business practices is the investment community’s defense of the company. Numerous high profile firms hold large stakes in Valeant. Bill Ackman’s Pershing Square, Jeff Ubbin’s Valueact, Steve Mandel’s Lone Pine Capital and Glenn Greenberg’s Brave Warrior Advisors all own millions of shares. When news of these transgressions came to light, I assumed these wealthy managers would denounce the company and exit their positions. I was wrong. One after another, they defended Valeant. None (to my knowledge) unloaded their holdings. Unbelievably, Ackman increased his stake in the company and, in his annual letter, blamed “attacks by short-sellers and the termination of a distribution agreement” for its stock’s decline. Wow.

Warren Buffett’s Berkshire Hathaway is IBM’s biggest shareholder, and perhaps biggest advocate. But the Oracle of Omaha took it to the teeth Monday when Big Blue’s quarterly earnings spooked Wall Street.

Armonk, NY-based IBM revealed third-quarter results that widely trailed expectations on the top and bottom lines, and was forced to abandon hopes it would reach annual per-share earnings of $20 by 2015. Traders panned the results, sending the shares tumbling 7.1%.

IBM has been looking to ride the wave away from enterprise servers and into cloud computing, specifically a realm called the “hybrid cloud.” The hybrid cloud essentially lets firms move certain operations into large, shared computing centers, and then retain the most sensitive operations in-house in a “private cloud.”

The cloud unit is definitely growing – but it remains a small portion of IBM’s overall business. The company said cloud-as-a-service revenue has risen 80% year-to-date to an annual run rate of $3.1 billion – a fraction of $97.4 billion in sales Wall Street expects for IBM in 2014.

Buffett has been betting big on IBM for years – in fact, he considers it one of Berkshire’s “Big Four” investments, and owns 7% of the massive company.  However, the legendary investor’s optimism didn’t exactly pay off Monday: Berkshire lost $908.8 million in a single day on the stock, bringing the conglomerate’s holdings in Big Blue down to $11.9 billion, according to a Yahoo Finance analysis of FactSet data.

Elsewhere in investing-titan news, John Paulson is getting clobbered on his investment in Shire. The hedge fund manager was pushing for a tax-inversion fueled merger between the Ireland-based firm and U.S.-headquartered AbbVie. The duo officially terminated tie-up talks late Monday.

Shire's shares have plunged 21.7% since early July.

A review of Paulson’s holdings in Shire’s shares trading in New York and London shows the fund manager is down roughly $445 million on the trade, including currency fluctuations. FOX Business’s Charlie Gasparino, however, reports that the bet is leveraged; suggesting Paulson’s loss could be closer to $1.5 billion.

Thorns in the Market...

Roses for Today...

And the All Time New Highs...

Orchestrated by many of the deal wizards who led Pfizer’s bidding for AstraZenica, AbbVie has gained verbal confirmation from Shire to move forward on the largest non-U.S. drug merger of the year. After five sequential bids, AbbVie’s $53.7 billion offer for the Dublin-based company was OK-ed Monday by the board. Led by Chief Executive Rick Gonzalez, the Chicago-based drugmaker will take the reins as long as they can provide the deal logistics at the set price.

$ABBV accretive deal. hep c soon to be on the market. $70 stock.

— Swingman24 (@Swingman24) Jul. 14 at 01:51 PM

Offering a 50.5 percent premium to Shire’s market price before takeover speculation erupted four weeks ago, the deal is now only an 12 percent premium to Shire’s closing price on Tuesday. AbbVie proposes to pay $44.71 in cash per share, and swap each of the remaining Shire share with 0.896 of an AbbVie share.

$ABBV getting destroyed. Overpaying for $shpg. $53 billion is way too much. Max pain coming

— Ari Gold (@AriGold) Jul. 14 at 08:54 AM

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$ABBV overpaying for $SHPG. This will not end good for Abbvie as debt load is simply astronomical on future revenues.

— Ari Gold (@AriGold) Jul. 14 at 09:11 AM

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It is hard to believe the company isn’t overpaying for the freedom to move its tax domicile, but as an analyst from British banking group Berenberg commented, “The company has to be of a certain size, because around 20 percent of the shareholders post-deal must be shareholders in the target company.” This ruled out quite a few of the options AbbVie could have been considering, and with quite a few companies already snapped up in the first half of the year, Shire looked like an increasingly eventual endgame.

On the value front, according to an analyst from Bank of America Merrill Lynch, pending completion, the deal will create $38 dollars per share in additional value to a combined company, which suggests AbbVie will be keeping upwards of 20 percent of that deal value to itself, discounting the purchase price significantly, and staying a lot of the complaining over the hefty premium.