Valeant: time to buy?

A controversial stock like Valeant can be a contrarian play for investors. On the subject of contrarian thinking I thought I would start this blog off with a quote from Monty Python’s “Right thinking people” skit:

Mrs. Havoc-Jones: Well, I meet a lot of people and I’m convinced that the vast majority of wrongthinking people are right.

Narrator: There seems like a consensus there. 

 

I continue to follow the saga of Valeant Pharma (VRX-T or US) with great interest. One investment guru – Bill Ackman of Pershing Square Capital Mgmt. – has owned a sizable chunk of this stock—which he bought at considerably higher prices. From what I’ve read, Mr. Ackman began buying VRX in March of this year –which looks like he bought around $250 USD. Ouch. Just recently, he added to his VRX holdings at much lower prices to bring his total to just under the “Insider Rules” limit of 10% of outstanding shares.

Mr. Ackman isn’t always right . For example – he shorted Herbalife (HLF-US) – in 2012 at $47-$48 – current HLF price is around $58. That said, he’s a notorious risk taker with a keen eye for real value—or lack of it. My favorite move of his was the CP Rail deal- where he executed a perfect old-guard for new-guard trade in their management, turning the company around 180 degrees – and profiting wonderfully in the process.

vrx

I thought I’d take a look at VRX from a technical perspective to see if Mr. Ackman’s timing on his new shares is any better than his original purchase. The weekly chart shows us a few things about Valeant (I refer to the NYSE listed shares–which trade at a lower USD price vs. the TSX listed shares given currency exchange):

 

  • Major support of around $110/sh broke in October
  • The stock is finding support at minor support around $70/sh
  • If $70 doesn’t hold, the next major support level is around $60/sh.
  • Moneyflow momentum (top pane) and cumulative moneyflow (bottom pane) were terrible, but are turning up.
  • Stochastics and RSI are oversold, and possibly hooking up – although MACD is not hooking up
  • Comparative strength (middle pane above MACD) is trying to firm up.

 

My take on Valeant at this time is that it’s a possible turnaround candidate—but given the stock’s fundamental uncertainty, resistance at the $110 level, and too-early-to-tell momentum signals, I’m hesitant to jump in. However. If you have the risk tolerance, there may be enough of a case here to leg into the stock on a partial position basis. I’m convinced that there will be some trouble cracking former major support in the $105-$110 range. Meanwhile, the weak support at $70 is a bit precarious – any cracks in that floor will likely see the stock quickly retreat to $60. So the upside is about $12 ($88 current price to $110 major resistance/former support price target). The downside is $19 loss potential ($88 current price to $69 stop price). That’s a trade that’s too risky for my blood.

 

BTW-on the subject of VRX-today Frances Horodelski of BNN notes:

“Another fact we talk about endlessly is Pershing Square and its recent acquisitions of shares in Valeant. As I highlighted a few weeks ago, the first 2 million shares may not have been purchased willingly but the result of being “put” the shares on a written option position. Yesterday’s filing on the recent increase in Valeant by Pershing Square highlighted a number of additional strategies. The additional 12.5 million shares were acquired through an OTC call option that cost $475.46 million. Simultaneous, Pershing sold European-style calls and puts (exercisable only at maturity) representing 12.5 million shares of VRX for credit of $168.97 million. So Pershing’s increased position to 9.9% is not through the outlay of $1.25 billon but a fraction of that. Complicated, shrewd, risky, questionable. Something to ponder.”

 

 

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8 Comments

  • Hi Keith,

    What are your thoughts on the gold stock sector now. The sector seasonally positive and seems to be showing some signs of a turnaround as far as I can see, but may need some more confirmation. Best to wait for a breakout?

    Thanks, Ron

    Reply
    • Ron–I do not endorse gold as a trade right now beyond a very high risk super-short oversold bounce

      Reply
      • Thanks Keith. I have been wary of the gold stock sector as well. It’s been reported that the odds of the FED raising rates in Dec is 70% and I would think that the US dollar would remain strong as a result. What has me interested in the gold sector (as a potential trade) is that according to The Sentiment Trader, the smart money is long gold at near extreme levels. Also there has been some short term technical improvement on the gold stock charts throughout the latter half of November re. money flow and momentum. There may be an opportunity coming. Just something to watch.

        Reply
        • I agree–its likely due to bounce oversold-like, but the problem is that there has been no base let alone a breakout from a base yet–thus, from TA 101 we cannot assume any change in trend.

          Reply
  • Hi Keith.

    In the same sector, do you think Concordia Healthcare (CXR) presents similar upside potential without the risk attributed to Valeant’s business practices? it’s been volatile lately but seems to be progressively gaining back some ground?

    Thanks
    Frederic

    Reply
    • Certainly CXR’s chart looks progressive from a base-building perspective–there’s a block at $60 it must blow through –but it would be pretty exciting if it did–and yes, it looks less risky than Valeant. Thanks for pointing this one out.
      The sector in general may be subject to the whims of Valeant shareholders and the shorters, so investors should be aware of that potential.

      Reply
  • Hi Keith. Glad to hear that you may be launching a fund– count me in.
    My questions are; Would it be a fund for accredited investors or any investor?
    Also, your opinion on accredited investor funds. Are they not unfairly restrictive to investors that do not have the qualifications to purchase such a fund? Do you know if the OSC is looking at easing up these restrictions in the future?
    Thanks
    Randy

    Reply
    • We’re still working on the details, and its not a sure thing yet–although its looking more and more likely.
      It wont be an OM fund (accredited investors)–it will be a fully liquid vehicle, available everywhere – likely in the form of an ETF –although even that is still in discussions.
      So, its not a done deal yet, still some ground to cover before it happens. But we’re hopeful for the next 3 months or so.
      Thanks Randy

      Reply

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