Vertex Pharmaceuticals Is Top Quant’s Latest Pick


Jeffrey Leiden, M.D., Ph.D., Chairman, President and Chief Executive Officer of Vertex PharmaceuticalsGetty

The worst December in 31 years has given way to the S&P 500’s best January in 32 years. The sharp turn around whipsawed investors who sold stocks in December and didn’t immediately reinvest the proceeds. Wayne Himelsein has been moving his capital into stocks that are better suited for the volatile market that has developed over the past four months. Vertex Pharmaceuticals is my top quant manager’s latest pick.

Ken Kam: Wayne, I have to say that in December, I was not fully onboard with your decision to stay 100% invested. Still, when it comes to making investment decisions where there is significant uncertainty, I’ve always found it is best to give the benefit of the doubt to the fund managers with the best track records. If you had gone to cash, our clients would have missed an incredible January, so you made the right call.

Wayne Himelsein: An incredible January is an understatement, opening the door to what’s in store for us in February.

Kam: What do you see for February and beyond.

Himelsein: The bleak reality is that nobody knows; the economy, at large, is impossible to forecast, and even it were possible, the forward view may have very little to do with “next month’s” swings. Short term variation is not necessarily long term truth.

Kam: I agree that movement in the short term may not be reflective of a longer-term outcome. Broad economy aside, why is this a good time to invest in Vertex Pharmaceuticals?

Himelsein: The nice thing about individual stocks is that they are easier to forecast, in my experience, than the broader economy. I think just given the sheer number of variables that can affect the economy vs the far more narrow range of issues that we can collapse into “good” or “bad” for a stock that we are following.

That said, the quintessential example of wild shorter term fluctuation that I expect to result in a great winner in the coming months is Vertex. This stock, at first glance, looks like it’ll whipsaw you right out; if you’re not holding on tight enough, you will fall off the train.

Kam: I see that. Vertex does not seem to be for the faint of heart. Seeing such excessive volatility, what gives you the conviction to hold onto this stock?

Himelsein: Undoubtedly, the size of its swings is daunting. But the magnitude of “swing” is just an issue of scale, not of quality. If we look at two amazing dancers in a dancing contest; one being a ballerina making intricate movements full of subtle turns and graceful hops, while the second is a modern pop dancer who is twisting, turning, and flipping with bravado and intensity, we must still compare the two irrespective of their chosen style. We cannot just say “graceful” beats “wild”, we must evaluate the quality of their dance.

To this end, I have analyzed and synthesized the quality of Vertex’s dance. And it rocks.

Kam: That’s quite a claim. In what way does it “rock”? Please share with us the ways in which you assess the dance!

Himelsein: Let’s start with the top it made in August of 2015, from which point it plunged, like a bowling ball tossed off a black diamond ski run, over 40% down until establishing bottoms around February and March of 2016. Worse yet, it got stuck in that pit, albeit with its fair share of swinging, for an entire year.

But then the world changed – drastically. The pop dancer inhaled a deep breath, peered down their runway, and took a running leap to throw themselves into the air, springing off their ankles with an energy that most could not hope to accomplish after even 10 years of practice. In this way, Vertex skyrocketed, in late March of 2017, from about $90 to a new high in the $ 160s over the next three to four months.

After an entire year of base building through 2016 and early 2017, it catapulted through its August 2015 high point with stunning intensity. In doing so, it re-established its power. It reclaimed its throne.

Kam: I’ve seen you liking that character of stocks, that seem to crash and burn, but then rekindle themselves and spring to new life. Is this the full thesis?

Himelsein: No, this is just the first round of the dance competition. We have not yet gotten to the finals! After claiming that new high in mid July of 2017, it spent the rest of the year declining. Talk about a swinger; leaping to new heights only to give it back? But no, it did not give it all back, it gave back only a very particular amount back, right up unto a very critical point.

In December of 2017, after almost 6 months of descent, it stopped, abruptly, at exactly the right point — at our August 2015 high of around $137. Like clockwork, it touched, and then catapulted in the other direction to make new highs within a single month at the end of January of 2018, and then again at the end of March 2018, for the most part, ignoring the broader market’s February tumble.

Like an exceptional wild dancer, it stopped the descent on a dime, tipped its toes the other way in an instant, and then leaped up yet again, to fly even higher.

Kam: You are spot on in terms of a wild ride. I had not noticed how precise the stock had been given how wild the fluctuations were. Is that your main point?

Himelsein: That is a big part of my point. The other big part is that there can be a method in the madness. Recognizing that all market inefficiencies arise from behavioral tendencies, i.e. investors either under- or over-reacting to good/bad news, and the associated pitfalls that surround these reactions, like loss aversion, prospect theory, etc… These drivers often push much wider swings than we’d like. But they don’t change, en masse, what the stock aims to do.

In this sense, it is our job, as investors, to look through the noise, however loud, to find the signal. With Vertex, after its multiple new highs over the course of 2018, including those I listed and more in July, and again in September, it concurrently made multiple higher lows, where the massive broad market correction in December did not even take it to its prior June 2018 low.

Kam: I see what you’re saying. It’s all about looking through the fog, and sometimes while the fog may appear gray, there is something wonderful on the other side, is that right?

Himelsein: Yes. Or in other words, amongst all the market madness of 2018, Vertex appeared, at first glance, just as mad in its own right, giving investors multiple swings in the 20-25% range. But all the while, it was climbing higher, never letting itself break prior low ground, and always reaching new heights. It was establishing a powerful uptrend amongst the market’s violence, as well as its own.

In sum, its strength has been unbelievable in the face of its peers and the broader market. More so, in the face of its own wildness. Accordingly, if you can handle the ride, get on in, latch yourself down tight, and ride with the wind as it takes us to higher heights.

My Take: Although 2019 is off to a strong start, I think last quarter’s downturn signaled a fundamental change in the market.

One reason is that we cannot count on falling interest rates to drive the market up as they have for most of the past 10 years.

But a second reason is that government policies that would facilitate the movement of capital towards more productive uses seem to have come to a standstill.

Without a supportive monetary or fiscal policy, I am not confident that it makes sense to invest in the market overall. However, even in a bad market, some companies will do well. We have to be more selective now.

I look at 2019’s strong start as giving us an opportunity to get out of stocks that can only move up if the whole market moves up. But getting out of these stocks is only half of the problem. The other half of the problem is figuring out which stocks we want to invest in.

I like the thought process Wayne has been using to reorient his portfolio. A lot of investors have told me they are struggling with the same questions. But Wayne has answered these questions better than anyone for years and has the track record to prove it.

Wayne Himelsein’s Logica Focus Fund (LFF) has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Wayne’s model averaged 11.62% a year which compares well to the S&P 500’s 5.57% return for the same period.

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