Talking Panic Buying With Joe Feshbach

Management turmoil offers good opportunities. Give us an example.

In the spring of 2003, prior to the launch of my fund, I bought Pediatrix PDX after the shares plummeted over 20% in one day. The CEO of only four months suddenly left without explanation. Analyst downgrades ensued, along with panic-selling on the theory that more bad news would eventually follow. In contrast, we quickly determined that the stock was very cheap. The founder and longtime CEO had returned to the helm, the company had produced very strong financial performance historically, reaffirmed guidance for the quarter and the year, and shortly thereafter announced a significant stock buyback. A year later we were selling stock up over 100%

Talk about intellectual-litigation opportunities.

We have recently built a position in Kinetic ConceptsKCI , a medical-device company embroiled in patent litigation with an upstart competitor. The stock is down by more than 50% and sports a market-value loss of about $3 billion from its peak. We think that the odds that KCI prevails in litigation are high. They have won five similar suits in the past few years in the United States and recently successfully defended their patent estate in Europe.

The shares can be had for about 14 times what we believe the company will earn in 2006, and, looking further out, roughly 10 times 2008 earnings power. We expect that the company will prevail in court, but on the odd chance it doesn't, we like its international patent protection, its dominant industry leadership position and the large additional market opportunity ahead of it.

You don't do distressed turnaround. Why?

One of our driving principles is to buy growth stocks at deep value prices. We take advantage of a crisis to in order to take advantage of what we believe is a significant disparity between price and value. It is also our belief that growth is necessary to offset potential deterioration from the impact of the crisis.

Are you an activist?

Of our six positions, four have controlling positions held by private equity firms. Two of our stocks have undertaken significant buybacks, and a third has put itself up for sale on its own initiative after our investment was made. We expect like action in the months ahead from the remainder. In effect, these companies already have stewardship that is incented to realize value.

You quit the board of QuadraMedQD. Why?

I have done activist investing in the past, though my QuadraMed board seat was a result of an invitation from the company. It is a personal belief of mine that psychiatry is a pseudoscience, and when the company began targeting its marketing towards psychiatric hospitals for its software, it violated my moral standards, and I resigned.