Now you know why I say "accounting irregularities equal sell." I'm talking Valeant (VRX) and the dissolution of a situation where I had been reassured repeatedly that the company's cash flow is strong and that you didn't have to pay any attention to the decline if the stock passed, say, $100, because it was all emotional. After all, the stock had fallen from $263; it's way overdone.
I heard this "way overdone" argument from pretty much everyone I talked to. Other than from a major pharmaceutical executive, I was assured that, after Action Alerts PLUS name Walgreens (WBA) gave it the "good seal of approval" with the deal it made with Valeant for cheaper drugs, there was nothing to worry about.
I refused to take solace in Walgreens' involvement because, after all, Walgreens gave Theranos the good seal of approval with its relationship, inked with that private company to do blood testing, and then subsequently backed away from Theranos when the FDA raised questions about that firm's methodology.
I had always been uncomfortable with Valeant rolling up drug company after drug company, slashing research and development and then raising prices. The company hit my radar screen as one to avoid when David Pyott, the former CEO of Allergan (AGN), told me on Mad Money that he didn't want his company to succumb to a bid from Valeant because he feared his company would be gutted by Mike Pearson, Valeant's CEO.
Brent Saunders, the CEO of Actavis, eventually came in as a white knight and bought Allergan, but then I watched as Valeant gained 100 points almost in a straight line. I felt like a jerk sitting it out, but I was simply uncomfortable with that roll-up business model.
But it wasn't until The New York Times and Citron, a short-selling research firm, questioned the accounting of Valeant that there was something to hang your negative hat on. Citron compared the company to Enron when it came to its accounting and, at about $150, slapped a sell on the stock, admitting he was short it, and used a target price of $50.
I think calling any company an Enron, among the biggest frauds ever, is bad, but sometime after Citron's Andrew Left's call, Valeant did reveal that it may have overstated its earnings when it reported last. That should have been the clarion call to get out no matter what.
Today, Valeant breached Left's price target, as it slashed guidance and offered questionable forecasts about the future of the company.
With the help of Carleton English, we checked in with Left to catch up with his view given how right he was about his price target. While he said he is no longer short the stock, his comments are cogent: "They bought all these drugs predicated on the fact that they could raise prices on them," he said. "They overpaid on everything they acquired. You have a double whammy here, where you have slower sales and you can't raise prices. At what point does your debt choke you out?"
Left asks a good question about the balance sheet, as the company has more than $15 billion in debt.
Left offers the coup de grace about why you can't touch a stock with accounting irregularities: "The hedge funds that are in it are left asking, 'What do we own now?' You don't know, so you have to sell."
There's one other tale of caution here. About 70 points ago, hedge fund manager Bill Ackman, perhaps the biggest supporter of Valeant, told you in a four-hour conference call that the real issue with Valeant was its inability to tell its story right. "They need help on the PR side," he said at the time.
I have always told you, please do your own work, do not follow the work of others. If you owned Valeant on Ackman's say-so, what do you do now? I return to my original thesis: Accounting irregularities equal sell.
That cautious stance will cost me at times, for certain, but when the big disasters occur, the ones like Valeant, believe me, you will always remember my admonition and smile that you avoided the stock that destroyed so many so-called smart people who just should have known better.