You want to know why I say "accounting irregularities equals sell?"
Valeant (VRX), that's why.
Ever since we first learned that Valeant may be using unorthodox methods to sell drugs, there's been a cloud over this stock's head.
If you go back in the timeline, the initial widespread charge -- as opposed to smaller leaks -- about how the company might be committing accounting irregularities came from a short seller, Andrew Left, from Citron Research. While unorthodox and inflammatory, Left's done some pretty good work and I thought his charges seemed well documented, even as it seemed a little rash to call it the Pharmaceutical Enron, as he labeled it.
At the time he published, the stock was in the $120s. Left slapped a $50 price target on it pointing out that the New York Times, which had written a story about Valeant's odd relationship with an outfit called Philidor, was just scratching the surface.
I had heard a lot of about price gauging and Valeant, but, frankly, a bunch of companies had been raising prices for drugs and Valeant just seemed like a more aggressive actor in the play.
But once I read Citron's stuff I figured, forget it, the upside isn't worth it. Don't get behind some stock when the accounting's being challenged, unless you get total comfort that the short seller was wrong.
I don't know about you, but ever since that report there hasn't been a day of comfort in this story. The most promising pro-line of thought in favor of Valeant evolved into something like this: even if this outfit, Philidor, was being used to move inventory in some shady way, it would not ding earnings that badly. Plus, if it slowed down the price increases, it would still have amazing cash flow.
I know I watched as hedge fund manager Bill Ackman and the CEO Mike Pearson tag-teamed a positive story.
But my rule is severe. I still had not heard anything that said that all of this was kosher. The stock plummeted down to $70 and I was glad my rule hadn't failed me.
Then in the middle of December, though, Walgreen's (WBA), which we hold in the Action Alerts PLUS charity portfolio, announced a deal with Valeant for discounted drugs. The stock spiked to $118 because of the Walgreen's good seal of approval.
Sorry, though, as much as we all may like and respect Walgreen's, they are not the U.S. government.
Subsequently, the stock drifted down on some political risk and some turmoil at the top owing to Pearson momentarily stepping aside from the job because of illness.
Then came a second accounting bombshell. On Feb. 22, the company said it had mistakenly recognized too much profit in 2014 and had to have some of that shifted to 2015. It then, bizarrely, exonerated itself for the error, as if there's no such thing as the SEC.
That news came out when the stock was at $76.
Now, if you had not yet been adhering to my "accounting regularities equals sell" doctrine, this time you just had to. The SEC hates restatements, and almost always opens an investigation into them.
Sure enough, the company, which has about the worst disclosure of any public company I currently follow, said nothing about it Monday morning when it decided to delay the release of the quarterly report. We only found out midday. When we did, the stock just got crushed.
Valeant's worth is now almost exactly half where we first learned that a strong case could be made that there were accounting irregularities.
Now, many times I have heard or seen tweeted or whatever that I kept people out of stories that were perfectly legitimate but happened to be tarred, perhaps unfairly, or unimportantly, with accounting charges.
It's true. I have been too cautious at times and have missed opportunities.
But from now on, can we just agree that when I say accounting irregularities equals sell -- something that came from the bad old days chronicled in Confessions of a Street Addict and, again, in Real Money -- that Valeant is a constant reminder of how right the dictum is? This one's a nightmare, a nightmare that could have been avoided simply by following a very easy principle that has always stood the test of time.