According to Nielsen Media Research, CBS' (NYSE:CBS) news show 60 Minutes is the nation's eighth-most-popular broadcast television show, reaching an estimated 15 million viewers. The show has been on the air for 38 years and has won more Emmys than any other program. With such a broad reach and an influential voice, it's a real shame that it did such a lousy job with last Sunday's segment on short-selling.
In a piece entitled Betting on a Fall, 60 Minutes told the story of Canadian drug company Biovail (NYSE:BVF) and its suit against hedge fund SAC and investment research firm Gradient Analytics (formerly known as Camelback Research).
The way 60 Minutes tells the story makes for great TV. Rich, powerful, and mysterious people with dubious morals manipulating the public markets for their own gain. How can you not watch a story like that?
Unfortunately, the show did a great disservice to investors everywhere by not telling the entire story. I'm not taking issue with the facts presented, nor taking sides in the litigation. It's up to a court to decide whether or not Biovail has a legitimate beef with SAC and Gradient.
My gripe as an investor is that 60 Minutes completely ignored what was going on at Biovail in 2003. It left the audience believing that these nasty short-sellers' attacks on the company were responsible for the stock's fall, without at least presenting other possibilities that I'd consider more likely and relevant.
Since I'm a stock analyst, let's talk about the fundamentals at Biovail for a bit. The company was flying high going into 2003. Revenue for 2002 was $788 million, up a robust 35% from the prior year. On Feb. 7, 2003, the company predicted that the good times would continue to roll, with 2003 revenue expected to grow more than 30%.
Investors were happy. The company's Q1 results in 2003 were very strong, backing up management's guidance for the rest of the year. The stock began to soar, rising more than 80% from January to June. That's a heck of a nice run.
Then the wheels began to fall off.
On July 29, the company reported Q2 revenue of $217, at the low end of the guided range. While that's not necessarily bad, it's usually not an encouraging sign. On Oct. 3, Biovail lowered its Q3 guidance by 15%. When Q3 numbers came out a few weeks later, they were once again on the low end of that range, and the stock dropped 13%.
Unfortunately, the company's problems went far beyond revenues. On the heels of those woes, consider this timeline of facts I pulled from Biovail's website:
- Nov. 13, 2003: The company reports that a class action complaint has been filed by purchasers of its securities.
- Nov. 20, 2003: Biovail announces that it has received an SEC letter initiating an informal inquiry into its accounting and financial reporting practices for 2002, and the quarters to date in 2003.
- Dec. 10, 2003: Biovail announces that Chairman and CEO Eugene Melnyk sold 2.7 million shares, which represents approximately 10% of his holdings.
- March 3, 2004: The 2003 earnings release shows top-line growth of only 4.5%, far short of year-ago projections for growth exceeding 30%.
Usually, declining revenue growth, guidance misses, class action suits, SEC investigations, or major stock sales by a CEO can cause stocks to drop in value from time to time. When all of these things happen within a six-month span to the same company, such a plunge is anything but surprising.
Indeed, Biovail tumbled 60% from June 5 through Dec. 31, ending the year 22% lower than it began. 60 Minutes would have you believe that this price decline was due to short-selling by SAC and questionable business practices by Camelback. But the timeline above tells a much different story. If you knew nothing about the company but the events listed there, how would you think the stock was doing?
Was Biovail's stock getting creamed because of a short attack, or because of lousy performance? And if you want to blame the shorts, did those nefarious short-sellers also cause the company's revenue to come in light?
My interest in this story is not primarily related to 60 Minutes, Biovail, SAC, Gradient, or the short-sellers. There's an important and more general investing lesson here: the principle of Occam's Razor. It states that the simplest explanation for a problem, the one requiring the fewest assumptions, is the best.
While some CEOs might draw attention away from their businesses' performance by invoking the short-seller boogeyman, rational investors should resist that distraction and focus on the crystal-clear fundamentals. Keep an eye on revenue, free cash flow, and margins. If a company is showing superb performance throughout its financial statements, the stock price will take care of itself. Let the conspiracy theorists and the courts worry about the other stuff.
Motley Fool biotech analyst Charly Travers has never had a financial interest, either long or short, in any company mentioned in this article. The Motley Fool's disclosure policy would impress even Andy Rooney.
