Don’t get me wrong — my pessimism on the foreseeable future for Vivus (NASDAQ:VVUS) has been pretty well-documented. Although I have no particular problem with the company or its recently approved weight-loss drug Qsymia, I’ve taken issue with the market’s hysteria that has pushed the stock well into overbought territory.
Sometimes, though, this business throws you a curveball, where the truth becomes more important than your opinion.
This is one of those times.
What the heck am I talking about? If you’re reading this, you’re probably aware that Vivus recently became a victim of some alarming research published by Citron Research. The basic gist of the report is that Vivus is going to have a near-impossible time defending its patent. The stock got crushed as a result, falling from $29 to the current price around $23.
It all begs one question, though … what if this Citron Research report is a bunch of junk?
Truth be told, it’s not like the potential pitfall Citron Research pointed out is totally without merit. As the research noted, “the fact that both ingredients are available and in wide use as generics makes enforcing the company’s patents far more challenging (and perhaps raises hurdles to negotiating reimbursement).”
Sounds reasonable, right? The problem is, Andrew Left has made some well-voiced arguments in the past that ended up being flat wrong.
Andrew who? Andrew Left — owner and operator of Citron Research, successful short seller and outspoken critic of lots of stocks.
He’s not always right, though.
Take Harbin Electric for instance. Back on June 16 of last year, a less-than-flattering research report on Harbin was posted by Andrew Left at www.citron research.com. Citron specifically said:
“It is Citron’s opinion that it is now time for the SEC to halt this security … Citron believes that, absent this sham buyout offer, shareholders are holding a company that is a potential zero… yes a zero, as in donut.”
Of course, the stock plunged from $14.30 to $6.98 that day. And why not? It was the end of the world for Chinese company.
Funny thing about that “sham buyout” of the “potential 0” stock, however: The company was bought out at $24 per share in October. That’s nearly twice the price of the stock before the Citron alarm bells rang, and nearly four times the price after Mr. Left’s commentary whacked the stock.
Left’s pessimistic views on World Acceptance (NASDAQ:WRLD) were equally unhelpful when they were voiced on May 7, 2009. The website states:
“Citron believes the prospects for sustainability in this business are bleak, not just in terms of social policy and politics, but WRLD’s exceedingly dubious financials also fail from a business standpoint. Any reasonable ‘stress test’ of WRLD’s iceberg-size loan portfolio would render the company a zero.”
Since then, World Acceptance shares have rallied from $20 to $67, and the company broke revenue and profit records in 2011. So much for “bleak.”
The Last Word
In the interest of fairness, it’s not like Andrew Left is wrong all the time. He also was on top of China MediaExpress Holdings (PINK:CCME) back in early 2011. Five months later, the stock had fallen from $13 to, well, basically nothing now. So, nice call. Of course, by that time, assuming a Chinese small-cap was a fraud wasn’t a huge leap of faith.
You get the idea … if you throw enough darts, eventually you’ll land a bull’s-eye or two. The market seems to be remembering Citron’s bull’s-eyes, but forgetting the misses.
Or if that doesn’t mean anything to you, maybe this will. While this has nothing directly to with stock-picking, about 10 years ago, Andrew Left was busted by the National Futures Association for making “false and misleading statements to cheat, defraud, or deceive a customer in violation of NFA compliance rules.” Though the conduct only led to a slap on the wrist, one has to wonder if there’s something else we don’t know about.
As for Vivus, maybe Andrew Left is right (sorry for the pun), or maybe he’s wrong. But think about this: Do we really think the company would have gone to all the expense and trouble it did without addressing the simple, obvious patent issues first? Stranger and dumber things have happened, but I think we have to give Vivus at least a little credit.
Yeah, I’m still not a fan of the stock, but of all the reasons to not like it, Citron’s opinion is not one of them.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.