Wednesday, March 15, 2017

Valeant stock lessons learnt from Bill Ackman

We have focused attention for the past year and one half upon the demise of and the unwise handling of the stock in Valeant Pharmaceuticals by the hedge fund community. We never understood the business plan adopted by this company and we never understood the stock’s sky-rocket move higher from ’12-mid’15 when it rose from $40/share to just “north” of $260. It made no sense to us then and when the stock fell from $240/share to $200/share in the early autumn of ’15 we argued then that the “There-is-never-just-one-cockroach” Theory was almost certainly to be in effect and that VRX’ shares were headed toward eventual failure.

When it gapped from $150/share to $120/share we argued again that lower price would prevail and that Mr. Ackman… and others following his lead into the company’s shares… was making a possible careerending decision when he averaged down on the trade. As our old friend, Paul Tudor Jones, has always said, “Losers average losers.” Further, when Mr. Ackman argued for a seat… or seats… on the company’s Board of Directors, thus making it almost impossible to sell his shares without doing even more damage to the company’s stock for sales then had to be made quite public, we argued that this was a truly ill-advised decision on his part and that it would serve only to tell the market that his block of shares remained as over-head supply that eventually shall have to be sold, likely in a forced manner.

Yesterday, Mr. Ackman announced that he had indeed sold his remaining shares in VRX and has asked to have himself and an associate released from their Board seats. This was a very public capitulation on his part and quite honestly we feel very sad for him to have fallen this hard and this publically for no one deserves that sort of ignominy. Nonetheless, it was his selling, we are certain, that drove the stock down in the course of the past two weeks from $17/share to under $12. Now he is gone and the market knows that his shares have been distributed into the stronger… or at least broader… hands of other investors. There is no longer a huge block of shares dangling like the sword of Damocles over the market’s head.

Ackman was not alone in this trade. Other skillful and formerly wise hedge fund managers followed him into Valeant and followed him all the way down. But we are rather convinced that those “hedgies” are out now that Mr. Ackman is out so perhaps a “punt” from the long side is reasonable. The coast is now clearer. Lessons have been learned… we hope.

Gartman warns in 2016 that Bill Ackman averaging down in Valeant could end badly