Valeant Pharmaceuticals Intl Inc: All the Bad News May Be Priced Into VRX

Could a new low for embattled Valeant Pharmaceuticals Intl Inc (VRX) finally spell real opportunity for bullish investors? There are no guarantees, but much stronger support than you’ll find from Bill Ackman is looking fairly attractive, compliments of a VRX bull put spread.

Valeant Pharmaceuticals Intl Inc: All the Bad News May Be Priced Into VRX

Following a lengthy reporting delay, bears — and probably a few towel-holding bulls — took another swipe at VRX stock in Tuesday’s session.

Shares of Valeant dropped by about 14.50% to a new five-plus-year low after the company announced a mostly expected, but still dizzying, $373.7 million loss and a much more surprising sharp cut to its earnings and sales forecast.

Valeant’s message of it not being able to “accurately predict earnings under generally accepted accounting principles” and the fact the company “believes adjusted earnings estimates” i.e. fudged numbers, actually give investors better insight into Valeant’s operations — also unsurprisingly failed to lift investors spirits.

As bad as it sounds though, VRX stock is pricing in a lot of bad news, with shares off more than 90% from last summer’s frolicking, pre-accounting scandal all-time-highs. Maybe?

If investors do need more support in making a buy decision, new and well-regarded leadership, solid GAAP cash flow, a sub 1x price-to-sales multiple and ‘possibly’ a breakup value well north of its market price help in defending VRX stock … well kinda, sorta.

VRX Stock Daily Chart

Source: Charts by TradingView

A funny thing happened on the way to Tuesday’s near-15% loss in VRX stock — it has finally found a more interesting-looking bottom.

While VRX stock now finds itself the scorn of flat-footed Wall Street analysts, Tuesday’s price drop in Valeant sets up a potential flush-out, triple bottom pattern on capitulation-worthy volume.

The reality of course is VRX could still move lower from here. Nonetheless, with the likelihood of a fast slide lower diminishing and shares maybe acting more like dead money for a quarter or two — an out-of-the-money bull put spread for positioning looks promising.

VRX Bull Put Spread

In reviewing the options board and with shares at Tuesday’s close of $24.64, the out-of-the-money July $22.50/$20 bull put spread is attractive at current prices.

Priced for 74 cents, the spread seller is able to capture the full credit if VRX doesn’t fall by more than 8.7% at expiration. That’s pretty decent in our view in light of what’s been addressed.

Further, the breakeven on this vertical is more than 11% below Tuesday’s close, while a max loss of $1.75 would require a bearish move of nearly 19%.

Bottom-line though — if you find yourself to still be a value investor in VRX and see future profits where others see losses, this spread trader can take possession of VRX stock at a price below current levels with contained risk while deciding whether or not to make that leap of faith.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds positions in TWTR and its derivatives for managed accounts.

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