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Valeant Crushed by “Short-Seller” Research Report

publication date: Oct 21, 2015
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author/source: Kris Rosemann

Additional uncertainty has surfaced around the biotech firm. We can’t say we are surprised, but the company’s share-price decline has been a monumental one. Despite Valeant’s strong reported performance in recent quarters, the Valuentum Buying Index kept us away from such a risky stock. Please understand why paying attention to the information contained in prices is an important component to any value-, growth- or income-based strategy.

Valeant Pharmaceuticals’ (VRX) shares have taken a major shellacking as a result of a research report accusing the firm of Enron-like activities. These are some serious accusations, and Valeant has since defended itself, which has given its shares a sizable bounce. We can’t say we’re surprised there was a material drop in Valeant’s share price, as we highlighted some of the risks surrounding its pricing policies in recent months, but this was a decline of unforeseeable magnitude. We’ve updated our 16-page report.

Though we have noted Valeant’s strong reported performance in recent quarters (its revenue growth has truly been impressive), it is important to recognize the fact that we have never truly liked shares. Despite Valeant’s tremendous quarterly reports and upward guidance revisions, we were never considering the company for either newsletter portfolio. The firm has flipped between a 3 and 6 on the Valuentum Buying Index in recent update cycles, far from an appealing score of an 8 or higher.

There may have been times when shares have looked attractive on a discounted cash flow valuation basis, but the Valuentum Buying Index methodology enabled investors to avoid the risks associated with the stock that could not have been found in the company’s financials or a discounted cash-flow model or any valuation process, for that matter. It is paramount not to ignore the importance of the momentum factor in the Valuentum Buying Index. Prices contain key information. That the company’s equity was being sold by other “intelligent” market participants prior to the most recent collapse was enough to keep us from catching the falling knife, thereby avoiding the inherent risks that were absent in its GAAP accounting--risks related to increased regulatory pressure in the pharmaceutical industry or “shady” business dealings.

This brings up another learning lesson made available through the recent developments at Valeant. We cannot emphasize enough how important it is that each individual investor do his or her own due diligence before investing in a given company. If individual investors blindly follow an activist investor into a company without doing their own research, they are bound to get burned. Activist investor Bill Ackman holds a considerable stake in Valeant and has added to it since the precipitous share price drop. If investors would have blindly followed this well-known investor into the company, they would have likely seen the value of their position decimated.

We are by no means celebrating the collapse in Valeant’s shares, but we wanted to take this opportunity to highlight the efficacies of the Valuentum Buying Index. This is an important learning opportunity for all investors, not just owners of Valeant. The combination of value and momentum based investing ideas continues to outperform both strategies individually, and one of the cardinal sins of investing is blindly following big investor names into a company. Warren Buffett and IBM (IBM) is yet another recent example, and the list goes on and on.

We encourage all investors to do their own research from a completely independent standpoint and take into consideration as much information as possible before arriving at a truly informed decision about a firm’s investment prospects. Doing otherwise simply defies common sense. Independence and the blending of strategies are ideals we hold dear at Valuentum. We continue to serve the investor through in-depth, unbiased research, the only kind of research worth reading, in our view. 


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