Don't like Allergan's stock volatility? Blame hedge funds, analyst says

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On Monday, Allergan reported 9.3% organic growth, posted a 35% cash flow margin, pledged to stay away from large buyouts for now and reaffirmed its plans to return cash to investors. But its stock slipped by as much as 4% during the day.

Why? Bernstein’s Ronny Gal has a theory: hedge fund ownership.

As Gal pointed out in a note to clients this week, Big Pharma companies tend to have hedge fund ownership of 3% or lower. Allergan, on the other hand? An “overwhelming” 17.7%, he wrote. That’s up quite a bit since the pre-Actavis days, too; hedge fund ownership sat at 4.1% under former skipper David Pyott.

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Unlike other investors, who may be taking more of a long-term view of a company’s prospects, hedge funds like near-term catalysts, Gal noted.  

“In short, we think the direct explanation for the volatility is that Allergan's investor base is heavily tilted toward ‘fast-money’, and those trade around near-term events,” he said. In other words, the 4% drop--and others like it--are "not indicative of a quarter being particularly bad.”

And he doesn’t expect that to change any time soon, as long as the composition of Allergan’s investor base resembles its current composition.

Allergan might want to do something to make sure it doesn’t, though. “It behooves Allergan to change the mix of its owners over time,” Gal wrote, and he thinks the company can do it. For one, it’s arguably as well positioned as it was during Pyott’s time, which means “the same mix can be achieved,” he figures. A dividend, which would make the stock more attractive to nonactive managers, might help, too.

One other suggestion? "Allergan should spend more time in Iowa," he wrote.

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