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.

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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