Sell and Avoid Valeant Pharmaceuticals Intl Inc.

Because of negative situations, investors should flee Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) and avoid it for good.

| More on:
The Motley Fool

For investors of Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) or those who see that the price has dropped and are salivating over the notion that it’s a discount stock, I would seriously advise that you either sell your shares or, if you don’t own any, avoid this stock like the plague.

What’s incredible is that a year ago, I would have advised investors to buy this company. It was experiencing tremendous growth, it was acquiring companies and integrating them, and if its CEO had his way, it would have become one of the top pharmaceutical companies in the world.

Unfortunately, nothing has gone well for the company since Andrew Left of Citron Research released his report that talked about how Valeant had been hiking drug prices and was using Philidor, a specialty pharmacy, to inflate revenue. This connection to Philidor could imply that Valeant was part of illegal activities, which would be disastrous for the company. Valeant is currently under investigation by the SEC.

But even if we take Left and the SEC out of the equation, there are two other factors that weigh heavily on this stock.

The first has to do with its weaker-than-expected results. In the fourth quarter, analysts had expected the company to have earnings per share of US$2.61; however, the company only delivered US$2.50. Every company is allowed to have a bad quarter, but for Valeant, the weak results appear to be the start of the norm.

Valeant revised its guidance downwards, expecting revenue to be between US$11 billion and US$11.2 billion. Previously, the company had been pushing towards US$12.5-12.7 billion. A US$1.5 billion drop in revenue is huge. This is going to seriously weigh the company down from an EPS perspective; it had been expecting to earn anywhere from US$13.25 to US$13.75, but now only expects to earn US$9.50-10.50.

But the other reason this stock should be avoided (as if the above were not enough) is because of who its investors are. The company is often referred to as a “hedge fund hotel.” There is over 20% of Valeant shares owned by the Sequoia Fund and Pershing Square. In total, 47.9% of the company’s stock is held by hedge funds.

Pershing, in particular, is in a unique position because Bill Ackman, the manager of the fund, made large option trades in November. He sold over nine million put options that expire in early 2017. Due to where the price of Valeant is presently, those puts have cost Ackman more than US$200 million.

At some point, Ackman is going to be put in a position to sell stock to cover these losses. One of the stocks Ackman could wind up selling is Valeant. That would scare other funds, which might then sell, forcing Ackman to sell even more. This might result in investors ditching the fund, which would require managers to sell even more. The actions of a few hedge fund managers could send this stock plummeting faster than an airplane in a nose dive.

So here’s the thing: be smarter than hedge fund managers. Get out of Valeant, take your losses, and avoid this stock. This has been a lesson to all of us that companies trying to buy their way to success, sometimes illegally, can cause everyone to lose money.

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 Jacob Donnelly 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

A tractor harvests lentils.
Dividend Stocks

Why Nutrien Stock Is Still a Great Buy on the TSX Today

Nutrien (TSX:NTR) stock has gone through major ups and downs thanks to outside influences, but its bottom line remains incredibly…

Read more »

Tech Stocks

Secure Your TFSA for Retirement: Top Stocks to Invest in Now

Here's how you can diversify your TFSA portfolio and hold quality stocks across multiple sectors, lowering overall risk.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

Build Your Retirement Fortune With These Top TFSA Stocks

Here are two top Canadian dividend stocks you can add to your TFSA to build wealth for retirement.

Read more »

Path to retirement
Dividend Stocks

Invest in These Stocks for a Worry-free Retirement Income Stream

Are you looking for an income stream that can pay you throughout your retirement? Then invest a portion of your…

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Could This Undervalued AI Company Be Canada’s Next Big Thing?

Open Text (TSX:OTEX) stock could be the next tech stock to surge from its use of artificial intelligence, making it…

Read more »

Dividend Stocks

Is BCE Stock Still a Top Telecom Investment in Canada?

Canada’s telecoms can provide growth and income in a defensive shell. Let’s see if BCE is still a top telecom…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks I’ll Be Buying Hand Over Fist in June 2023

These two beaten-down Canadian dividend stocks could help you earn handsome returns on your investment in the long term if…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Dividend Stocks

If You’d Invested $10,000 in Loblaw Stock in 2012, Here’s How Much You’d Have Today

Loblaw stock had a crazy decade, with many huge moves. This could have created wealth from a $10,000 investment, but…

Read more »