To say the past couple of months have been uncharacteristically bullish for Vivus, Inc. (VVUS) would be a significant understatement. After spending the past two years losing more than 90% of its value, Vivus stock has rallied an impressive 115% from its late-August low.
Even more telling is that the volume behind the VVUS rally has been unusually high, suggesting the participation/conviction levels for the advance are quite high.
The move sparks several questions, the biggest of which is, why? The second-most pertinent question is, can the rebound effort continue?
The answer to the first question is that a big-time investor has indirectly taken on a big stake.
The answer to the second question is … well, it depends.
Not Just a Little Volatility for VVUS
The chart of Vivus stock below is striking. Ever since Aug. 24 when the stock quietly made a new low, VVUS has been on the mend to the tune of 105%.
It started out slowly, with the reversal flattening out rather quickly at a horizontal support level established in early August (red, dashed). But beginning in early September and then heating up in late September, Vivus shares made a mirror image of the accelerated selloff that started to take shape in late July. That symmetry alone has modest bullish implications.
It’s what has happened in the meantime, however, that’s so interesting.
Old-school chartists will immediately recognize the cup-and-handle pattern that’s unfurled over the past couple of months, with the handle piece of the pattern being formed by the mid-September lull. (The cup is the August lull and early-September rebound.) With the recent bullishness and today’s big 10% pop from Vivus stock, though, the brim line (black, dashed) of the cup has been breached to the upside, suggesting a great deal of pent-up bullishness is finally being unleashed.
Is it a signal to trust? Maybe, but this particular trading pattern has a back story — and potential caveat — to go with it.
Why?
Although the chart’s key pivots and the official news don’t perfectly align, they line up well enough to say there’s a cause-and-effect relationship in place. And the cause for the sudden bullishness beginning in early September (and even as early as late August) is, Carl Icahn has made a huge bet on Vivus.
It’s a bit unlike Icahn, in terms of scope and strategy. The activist investor tends to target large companies so he can make large trades, and does so by buying stock.
That’s not how he’s playing Vivus, however. Instead, Carl Icahn has chosen to buy short-term notes (bonds) that give him the right to convert them to shares of VVUS, but not the obligation to do so.
All told, Icahn bought a total of $170,165,000 worth of the debt at 68 cents on the dollar, translating into a cost of about $115 million on an investment that will earn him 4.5% of the $170 million until 2020 … at which time he’ll recollect the full face value of the notes.
As far as debt-based investments go, it’s not a bad deal, but it’s not exactly Icahn-esque.
There’s more to the story, though.
Each of those notes is convertible to 67.3 shares of Vivus stock. If Icahn were to convert all the notes he’s about to own, that would make him the owner of about 11.4 million shares. Oh, and that would also make him the company’s largest shareholder. That sounds like the Icahn we all know and love.
The twist? The disparity between the notes’ value and the stock’s current value is widely in favor of not converting.
Bottom Line for Vivus Stock
However you slice it, this is an encouraging development for current owners of Vivus stock.
The best-case scenario is that Icahn’s bet pays off big-time as the stock soars and Icahn converts his holdings to shares. The worst-case scenario is VVUS at least manages to keep paying on its debt, which is a sign of strength in itself; we have to assume Carl Icahn isn’t going into the huge position expecting the notes to not at least hold their current value.
Either way, one of the market’s best and most influential (even if widely hated) investors just placed a performance-based bet on Vivus, or at least its potential.
In that light, we may want to take the chart’s bullish clues at face value.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
