Should You Follow Billionaire Bill Ackman and Bet on Valeant Pharmaceuticals International Inc.?

Valeant Pharmaceuticals International Inc. (TSX:VRX)(NYSE:VRX) has achieved fantastic returns thus far. Will this continue?

| More on:
The Motley Fool

Activist investor Bill Ackman of Pershing Square Capital Management has been in the news a lot, with mixed results. On the negative side, he got caught up in a debacle at JC Penney, in which he lost about $500 million. His stake in Fannie Mae and his short bet on Herbalife have yet to work out.

But Mr. Ackman also has had some big wins – the most notable one in recent years coming at Canadian Pacific, in which he successfully ousted some board members and the old CEO. CP has increased four-fold since he began accumulating his stake.

And Mr. Ackman is a very well-respected man on Wall Street, so his actions are certainly worth following. That brings us to Valeant Pharmaceuticals International Inc. (TSX: VRX)(NYSE: VRX), a company that he is teaming up with in a big takeover attempt. Mr. Ackman has also defended Valeant on television numerous times, and has indicated he is ready to accept a big stake in the company – assuming the merger attempt is successful.

So that brings up an obvious question: should you believe in Valeant too?

A strong track record

There is no denying what Valeant has been able to accomplish under CEO Michael Pearson. Under his leadership, the company has adopted a fairly simple strategy: spend money on acquisitions, rather than R&D, then slash costs once targets are acquired. It’s allowed shareholders to earn a 60% annual return over the last five years.

Still going strong

Valeant is still aggressively going after drug maker Allergan Inc. (NYSE: AGN), best known as the makers of Botox. Granted, there have been some setbacks. Allergan as ferociously resisted Valeant’s offer, calling it “grossly inadequate.” Meanwhile, Allergan’s market value has reached $58 billion, surpassing the initial offer. The company has also been in talks with another drug maker, Actavis PLC, about a rival bid.

But there are some factors working in Valeant’s favour. First of all, Mr. Ackman has been granted authority by the courts to vote in Allergan’s next shareholder meeting. He plans to vote against the current slate of directors.

But more importantly, Valeant has other options. In fact Mr. Ackman recently disclosed it owns 8.5% of Zoetis Inc. (NYSE: ZTS), which specializes in animal health. Zoetis could be a perfect plan B for Valeant – after all, it meets all the criteria that Valeant looks for in a target company.

The important thing is there’s always another option for Valeant. If it sticks to its business plan, the company will be just fine.

Don’t bet too much

So Valeant may be worthy of a small portion of your portfolio. But you shouldn’t bet the farm.

Valeant is known to use tricky accounting methods, a by-product of its acquisition-first strategy. In fact, the company technically lost $2.70 last year, according to conventional accounting methods. Secondly, the stock is very expensive, trading for over five times sales. So this is still quite a gamble.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

More on Investing

Senior housing

3 Lesser-Known Reasons to Invest in an RRSP

The RRSP has so many more benefits that investors might be unaware of, and can be used for your benefit…

Read more »


TFSA Blueprint: 4 Canadian Stocks to Secure Your Future

Successful TFSA investing requires four steps and four Canadian stocks to secure your future.

Read more »

gas station, car, and 24-hour store
Energy Stocks

Is it Too Late to Buy Suncor Stock?

Suncor Energy stock has rallied big in the last year, but expect it to move higher as efficiencies keep rolling…

Read more »

Payday ringed on a calendar
Dividend Stocks

TFSA Monthly Money: How to Generate Consistent Tax-Free Passive Income

Adding these two attractive Canadian dividend stocks to your TFSA now could help you earn reliable monthly passive income for…

Read more »

analyze data
Dividend Stocks

3 Magnificent TSX Dividend Stocks to Buy and Hold Forever

Do you want to hold some quality dividend stocks for the decades ahead? Here are three stocks worth holding for…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Tech Stocks

Up 51% This Year: This Canadian AI Stock is Still Down 65% From Its Highs – Time to Buy?

Copperleaf Technologies (TSX:CLPF) stock has shown positive momentum as the AI stock attempts a recovery. Can shares rise 180% to…

Read more »

Oil pipes in an oil field
Energy Stocks

TSX Energy Sector: Best Stocks to Buy in May 2024

Energy stocks like Suncor are generating massive amounts of cash flows and paying out significant dividends.

Read more »

Dividend Stocks

How Much Will Canadian Utilities Pay in Dividends This Year?

Investors can stabilize their long-term stock portfolio returns by accumulating quality utility stocks on meaningful dips.

Read more »