The phrase made famous in the movie Forrest Gump could just as easily apply to almost anyone speculating on the recovery of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock.
Tom Hanks played Forrest Gump and won the Best Actor Oscar for his performance. In the movie, Forrest Gump was talking about how looking stupid doesn’t make you stupid.
In real life, betting on VRX stock is something only the savviest of investors should consider. Here’s why.
The Options are Plentiful in VRX Stock
There are 61 healthcare stocks in the Guggenheim S&P 500 Equal Weight Healthcare ETF (NYSEARCA:RYH) invested equally among the exchange-traded fund’s $706 million in total assets.
Charging just 0.4%, it gives you exposure to six different industries within the healthcare sector. The average market cap is $32.6 billion, providing investors with the ultimate blue-chip portfolio.
The one thing it doesn’t have? VRX stock. And that’s a good because the goal of successful investing is to make money while preserving your capital.
Performance-wise, Morningstar gives it four stars on a risk-adjusted-return basis over the last three-, five- and 10-year periods. Although it’s coming off a rare down year, down 4.5% in 2016 — only its second year of negative performance over the past decade — it has bounced back nicely, up 19.6% year to date.
Most importantly, it has tripled VRX’s performance in 2017. Sure, you could have made upwards of a 75% return on your money in less than four months had you bought Valeant Pharmaceuticals’ stock at its April 24 low of $11.20, but market timing is for suckers.
Other ETFs Holding Valeant
Two ETFs give VRX stock a weighting of 2% or higher: the Buzz US Sentiment Leaders ETF (NYSEARCA:BUZ) at 2.68% and the PowerShares Dynamic Pharmaceuticals (ETF) (NYSEARCA:PJP) at 3.11%.
BUZ is an interesting ETF that focuses on the stocks most often mentioned on social media. Valeant certainly fills the bill. However, at 0.75%, it’s just not worth it; perhaps that’s why it has only been able to gather $8 million in total assets in its 16-month existence.
PJP also is highly rated by Morningstar, has a smaller number of holdings (30) focused on the pharmaceutical industry, and has been around a year longer than RYH.
However, RYH charges less than PJP at 0.57% vs. 0.75%, and it has seriously outperformed PJP in recent years although we know that past performance doesn’t predict future performance.
If you have to own VRX, PJP is the way to go. Otherwise, to get your healthcare fix, I’d go with RYH.
The Only Way
As I quickly look through Valeant’s most recent 10-Q, the first thing that comes to mind is that it has got a real problem.
Investors have long debated whether Valeant should sell Bausch & Lomb, the biggest piece of the company pie, to pay down debt. However, that would mean giving up what is arguably its most stable asset, if not the most profitable.
The alternative would be to keep Bausch & Lomb and sell the Branded Rx business, which includes Salix Pharmaceuticals. In the second quarter, the Branded RX business generated just 29% of Valeant’s overall revenue but with 54% profit margins, almost double Bausch & Lomb’s.
Unfortunately, as InvestorPlace.com’s Ian Bezek reminded investors recently, Valeant’s core holdings of Bausch & Lomb, Salix and its dermatology businesses aren’t performing nearly as well as they need to for the company to fully recover from its debt hangover.
Bottom Line on VRX Stock
As I like to say about investing and life: “You’ve got choices.” Buying VRX stock is a dumb one.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.