When you see rip-your-lungs out declines like that from Valeant (VRX), almost cut in half yesterday, you know one thing: the shareholders in these stocks are the worst. They either don't know what they own or they don't believe in it -- including the fact that it is, or purports to be, cash flow positive -- and are just waiting for a couple of up days to unload, days that won't come or are going to be such a rarity, that you would rather sell at any price.
The stunning decline in VRX is one that will be remembered for the ages, one that I have only seen during the dotcom period, or when a very levered company says it simply can't pay the bills, not a company with positive free cash flow. When I saw that stock go from $150 to $88 in just a few hours on the charges leveled by Citron that it was an out and out fraud, I recognized that there's simply no way the holder had any conviction in this one at all. Sure, it is tough to be able to hold a stock through a trouncing like that stemming from Citron's report that Valeant used a middleman to stuff the channel with product, and calling it Enron Part Deux.
Now, I have seen stocks in my time that have rallied big and then given up a lot of those gains -- but this stock has now retraced a phenomenal 160-point move year over year.
When you see that kind of reversal, you can conclude several things: one is that it should never have been up there to begin with, and was given way too much credit for the acquisitions it made, ones that were then put through the tax inversion to pay the U.S. less in taxes. A second is that it's just a big phony and is going to revisit the intraday levels, unless it can fully address the charges and come out unscathed from the various investigations of the entity. A third is that the shorts have it on the run and the earnings, which were just reported, are now meaningless.
Now, Valeant did itself no favors when it came out earlier this week and said that it was going to start changing its business model and no longer rely on price hikes while doing more research and development. The problem with that approach is that many of the faster money shareholders liked it for precisely the opposite point of view: that it was rationalizing the process and making more money with less.
I don't know how the entire shareholder base doesn't turn over now that the story has changed and the subpoenas are flying. No one who bought this stock on the way up wants to see either happening.
When a company changes stripes like that, you can bet it will be a source of funds for the ages. Unless it can suddenly put a dividend and a buyback in and discuss a steady, well-researched pipeline, I think this is the new normal for this stock, which did trade as low as $76 back in May of 2013, where it sure feels like it is going.
Now, it is true that hedge fund manager Bill Ackman bought two million shares in Valeant yesterday, adding to his already considerable stake of 19 million shares, or slightly more than 5% of the company. But that's not the kind of investor who can put in a bottom. It takes a different kind of holder, a giant mutual fund or two to step up to the plate and buy some. That simply hasn't happened. Oh, and how ironic, isn't it, that the only other time I have seen such a swoon in a stock that I can recall was when Ackman trashed Herbalife (HLF) in front of a national television audience.
The result? Despite the actual cash generation of this company, I think the selling's not done. If anything, I expect that we will see those lows again if something negative comes out again that's not a rehash of what has already been out. And given that Valeant had been a leader in the group, believe me when I say that without a sustained advance in this very wounded stock, this group -- and by that I mean health care -- just can't return to any of its former glory, especially not in a world where the hospital stocks, last year's darlings, and the biotechs, now subject to such pricing scrutiny, can't get out of their own way.