Recently, Valeant Pharmaceuticals (BHC 2.99%) shares dropped 60% in a week after it announced on March 15 it would miss its annual report deadline -- and this was after the stock tanked by almost 90% in the past eight months. But even though a few notorious investors are buying in at this steeply discounted price, the stock is far from a safe bet.
In this segment from the Motley Fool Money podcast, Matt Argersinger, Chris Hill, and Jason Moser go over some of the company's many red flags, and why it's so important for individual investors to do their own research, instead of just repeating the moves made by the big names of Wall Street.
A full transcript follows the video.
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This podcast was recorded on March 18, 2016.
Chris Hill: Shares of Valeant Pharmaceuticals down 60% after the company said it would miss a deadline to file its annual report. CEO Mike Pearson sent a memo to employees ensuring them that the company was not on the verge of bankruptcy. I guess it just kind of looks that way, huh, Matt?
Matt Argersinger: Chris, it was, gosh, three weeks ago I think we were on this show, and I think we said, "Where there's smoke, there's fire." Well, it turns out, there's actually napalm (laughs), when it comes to Valeant Pharmaceuticals.
Not to be dramatic, but this is a company with a lot of problems right now. So, delaying the 10-K filing, companies do that a lot, but usually for the wrong reasons. It's usually because there's an accounting irregularity, and it turns out they probably have several. And what that does, more worrisome, is that's going to possibly trigger accelerated debt payments from their bank lenders.
Now, this is a company with $30 billion in debt -- three times the market cap right now, a shrunken market cap. And you have the CEO who's potentially leaving, you have a shifting back toward what they say is going to be organic growth versus acquisitions, which is what they're known for. There's so many red flags, I don't even know where to start with this one.
If you're an investor who's looking at this company and thinking, "Hey, Bill Ackman's buying this! He owns it! It's down 80% from its all-time high, it's got to be ... " Well, be very, very aware.
Jason Moser: Sure. I think that's something that we all have agreed on for a while here now, that this is a business that's obviously in big-time trouble. I find it interesting: When you ask management, "Are you on the verge of bankruptcy?" "Well, we're not on the verge of bankruptcy, but we're kind of getting close to the verge."
Hill: "We're a couple blocks away."
Moser: "So we're going to try to, like, back away from the verge." I'm not saying these guys are on the verge of bankruptcy. But their strategy is going to have to make a massive shift here, because when you have a business that grows via acquisition, and typically issues equity to do so, and now that equity has gotten hammered -- no one wants those shares as a currency. Well, no one in their right mind.
Again, Matty said it, and I think we said it last week: There are more red flags than we can count here. There's no reason at all for a rational investor to jump in here, unless you just really feel like flipping a coin or taking a bet. And to his point about Ackman ... I'm not quite sure why Ackman gets all that press. Maybe it's the hair or something.
Hill: He's got good hair.
Moser: (laughs) But he has a number of poor investment decisions that he's made, and it sounds like this is another one.
Argersinger: But that's a whole 'nother topic we could get into. And we should get into it at some point, because Bill Ackman, his fund is down -- not only $3 billion in Valeant, but his fund has lost about 50% of its value since roughly mid-2014. It's amazing to me that investors, like lemmings, continue to flock to this guy, in the media or wherever else.
Hill: We talk all the time about emotions for investors, and I, at least, understand the emotion. This is a stock that, eight months ago, was over $250 a share. Now it's in the high $20s. So, from just the emotional standpoint, I can see that [idea]: "Well, gosh, it's not going to $0. It's got to bounce back up, at least a little!"
Moser: Well, and I would say -- and I've had that question asked on Twitter a number of times over the past week, and that very well may happen. But before you make that leap, you'd better identify that catalyst that's going to turn this around. Don't think it's just going to automatically turn around because it used to be there. There are good investors who really did a lot of work on this business over the past year, felt like it was a good investment, who have really gotten burned here. So there was something that was more or less under the radar there that they weren't able to find.
It's not to say that if you call Valeant as being a good investment, and then it's not, therefore you're a bad investor. That's not how that works. But you really do have to make sure that you understand it just doesn't automatically bounce back just because it was once there before.
Simon Erickson: Yeah, and Jason, I think the thing that was under the radar that the rest of investors were missing was the underlying business itself. You know?
Erickson: Their whole growth-by-acquisition [model], that's great, but we're in the era of personalized medicine. There are a lot of other competitors out there developing core competencies, that are actually investing very heavily in R&D. We haven't seen that from Valeant. I think they're behind the curve on this one.
Moser: And let me just say this, to be fair: We're not just picking on Bill Ackman here. I think the bigger point here is to not look at any of these investors that get all of these headlines in the financial media, and just make the assumption that, "Oh, that investor's doing it, therefore I should follow in their footsteps." Always make sure you do your own work and come to your own conclusions, because nobody's batting 1,000 out there.