In the shadow of a 90% pullback since its July highs, there’s no denying Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been a tough stock to own of late.
At times it seemed as if everything that could go wrong did go wrong, and the more that went wrong with Valeant, the more the market as well as the media loved to pound on it. Indeed, many have mentally left VRX stock for dead, assuming what remains of the carcass would be picked apart by the buzzards.
And yet …
As the old Baron Rothschild investing adage suggests, “Buy when there’s blood in the streets, even if the blood is your own.” It may be time to apply that premise to VRX, while few others are even thinking about it.
Some curious things have happened in just the past few days that suggest a bottom might — and I stress might — have been made.
Nothing Lasts Forever
Just in the interest of fairness and disclosure, yes, I am the same guy (one of them, anyway) who was shredding Valeant Pharmaceuticals since the middle of last year. I got the ball rolling in March of last year, questioning the company’s willingness to take on huge debt after it acquired Salix, and I reiterated my concern on Aug. 20 when the company acquired Sprout. In the meantime, I’ve chimed in (mostly in agreement) when traders punished the company’s missteps by sending VRX stock lower.
There does come a point in a pullback, however, where if nothing else the value of the IP, the current revenue stream, and even all that office equipment has to be acknowledged, With a current market cap of only $11.4 billion, Valeant is arguably there.
Yes, the business model has been busted. No longer will politicians and/or the American public allow Valeant to acquire specialty drugs and then jack the price up to nosebleed levels. That headwind has pretty well been priced into the stock, though. Again, VRX is presently trading at a 90% discount to its mid-2015 peak when the company was sitting on top of the world. Regulators can’t pressure the company to give its drugs away for free though. The worst-case scenario is Valeant closing shop and liquidating everything of value it owns. That should be worth more than $11.4 billion.
I don’t think that’s in the cards, though. I’ve got a good feeling Valeant Pharmaceuticals intends to remain in business, and though it will be tough to service $30 billion worth of debt with a drug revenue stream that’s going to be a lot smaller than it was projected to be just a year ago, Valeant isn’t exactly dead in the water here. Just how much can the $10 billion worth of revenue it’s driven in the past four reported quarters be whittled down?
Today’s 15% gain from VRX stock says other investors are starting to see the same light. That’s not the only bullish clue we’ve seen regarding Valeant lately, however.
VRX Stock Dropped Most of the Right Hints
Extreme caution is still advised with VRX, simply because it’s still being driven more by rhetoric and sentiment and less on fundamentals. But, there are some key technical clues that suggest the worst is behind us.
First and foremost, although it wasn’t of textbook-quality, the March 15th plunge in the wake of a weak outlook and the announcement it might technically default on its debt was a very high-volume affair.
This big flush-out has thus far exhibited all the telltale signs of a true capitulation, in that shares haven’t lost any more ground. In fact, we’ve seen a great deal of high-volume buy-ins since then, suggesting the bulls are finally starting to test the waters again.
It’s also encouraging that the federal probe of the company’s relationship with questionable pharmacy company Philidor has ended with no fault being found.
It’s still risky, to be sure. It’s a trade not without commensurate reward potential though. The one thing the market loves just as much as a good ol’ fashioned implosion is the all-American redemption story. With just a few more of these gentle nudges, the rhetoric — and the stock — could turn bullish again. The value aspect of the story is certainly in place.
All the same, keep it on a short leash with the use of protective stops.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
