Valeant (TSX:VRX), finally a stock for people who don’t want to sleep at night

One of my closest friend told me to go long Valeant (TSX:VRX) in late 2014, back when the share was trading at “just” $140. He swore to me that the stock would double within a few months. While his timing was off, he was right: Valeant hit $335 a share in mid-2015 and he gloated about it for weeks.

Then, he did something dumb. Something really, really dumb. Of course,  at over $300 per share, he could have taken some profits off the table. Doubling your money is pretty much what all trader dream of and with the company now valued at $100B, it made sense to reduce exposure and risk. He, however, suddenly became utterly convinced the stock would breach the $1,000 mark within years. When the stock fell back to $220 in October of last year, he doubled his position. “It’s just volatility. Profit-taking. The stock is so oversold,” he claimed. “If anything, I’ll get the bounce back to $280, then I’ll sell half.”

When the stock fell to $100 less than a month later, he flipped his shit out - literally. He became so obsessed with Valeant that it started to invade every aspect of his entire life. He spent every minute of his day watching the stock price, panicking at every little drop and stressed out over every little movement. When the stock bounced back from $100 to $120 in November, he officially called a bottom and spent about an hour explaining how “basically had to double down.”

At this point, Valeant was almost half of his portfolio.

And for a while, it went okay. At $150 per share, he could have exited his position with a minor loss. Sure, it sucks to go from doubling your money to a small loss, but things are what they are. But of course he didn’t.

When the stock starting plunging again and when it broke through the $100 barrier (on the way down, to clarify), he had a mental breakdown. He literally had a breakdown: his girlfriend found him in tears, on some pill/drug (making one of Valeant’s drugs, ironically), and had to call 911. He ended up hospitalized for a week and even there, he begged the nurses for updates on Valeant (or so his girlfriend said, which I believe). Here’s how he rationalized the situation afterwards:

“When I was admitted to the hospital, the only thing I could think about was: buying more Valeant. It just screamed ‘undervalued’ to me. But the doctors didn’t want to let me out. Now that I look back at it, it was a good thing, because I certainly would have bought more at $90. I think I would have sold all my positions to buy just Valeant. And now I can do it, but at a much lower price than that. Doctors saved me money.”

By the time he got out, Valeant was at $35. His losses were so massive that he had basically given up on life. “I just lost over a hundred grand, what’s the point of working for $50,000 a year when I lost almost three years of salary on one stock? The next three years of my life, I’ll be working for nothing.” He then decided to go all-in and liquidate his other positions to be 100% invested in Valeant.

The stock bounced up in the mid-40s and, again, he could have exited his position with a large, but still manageable loss. With an average cost somewhere in the 60s, he would have lost around 25-30% of his investment, nothing any trader shouldn’t be able to deal with. But of course he didn’t. In fact, he decided to go on margin to buy more. “I’m going to keep buying at it falls - my next level is $43, then $41, then I stop if it breaks the support at $40, then I buy more at $37, blah blah blah.”

Today, the stock traded as low at $29 per share. I haven’t talked to him yet - I am not one to torture others needlessly - but my guess is that he most likely bought even more. Eventually, he will be 100% margined into the stock.

And then what?

Is Valeant undervalued? I have no idea. I don’t trade pharmas. My read on pharmas is that 95%+ of them are worthless anyway. Valeant is a big cap stock, which makes it slightly interesting, and I definitely look at large capitalization companies that are down 90% from their peak, but I’m still not interested. I have no idea whether a drug is a good investment or not. Hell, even the pros don’t, so I don’t pretend to know biotech more than people who studied 15+ years in it.

I cannot find a real reason to buy Valeant today. Is it undervalued? It looks undervalued for sure and any competitor could easily make a bid for Valeant for $50-60 a share (giving the drug patents portfolio it possesses). I mean, Valeant bought Salix for $11B and the company is now valued at less than that, which makes little sense to me. It also bought Bausch & Lomb for $8.7B and a plethora of others over time. I have to say that even if the company was plagued with problems, which it definitely is, there is no way Valeant is worth less than $50B less its debt, so around $20B in total. Valeant is currently valued at $10B, so it is probably undervalued by 50%.

An easy double up? My friend thought so too two years ago. Overall, the company is too terribly managed for me to even considered investing in it. Similarly, I simply do not trade pharmas, so Valeant remains a no-go for me. For all I know, Valeant could go bankrupt. It probably won’t, but it’s certainly a possibility.

Will my friend make his money back? I don’t know. The stock could shoot above $100 just as fast as it fell below it for all I know, but I wouldn’t bet on it. It’s not an attractive bet for me. The stock price graph is one of those moment that screams “don’t touch this if you value your sleep.”

My point is, your health has a price too. Sleeping soundly at night is valuable too. It’s crazy how often people undervalue their private, personal life and their health, just for the chance to make a few bucks on a crazy gamble. Investing all your money in a very complex, very closed-up company that may or may not be there in 3 years? What could possibly go wrong with this?

Valeant is the perfect stock for people who do not like sleeping at night. I’ll never understand why people buy this crap. It’s just a terrible bet to make, even as a long shot. Look at how incompetent the management was: are you sure you want your money in the hands of those people? Are you the kind of person who look at a manager who lost 90% of his company’s value and think, “Wow, this guy really knows what he’s doing?” Yeah, I thought so.

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5 Responses to Valeant (TSX:VRX), finally a stock for people who don’t want to sleep at night

  1. archaic June 19, 2016 at 5:51 pm #

    J.M. Pearson has departed.

    so may be there is a hope for a turnaround.

    strong buy at 20$ lol

  2. Sean June 23, 2016 at 5:49 am #

    Wow. That’s nuts. Greed does it every time.

    I learned this after going through the same thing as your friend… way less lost… but the same idea. Keep adding because “eventually it’ll turn around”. Brutal indeed.

    I’ve not since learn to never ever ever add on a losing position unless you’re an absolute pro. You add once… you’ll add again…. and then again…. and then again because hey… it can’t keep going down and it’s surely going to bounce soon!

  3. John Shaeffer June 26, 2016 at 6:14 am #

    It can happen-you can average in and be vindicated-look at the PM miners crash and then recovery for the first 6 months of this year. Still, when you look at the gold:pm stock ratio, you realize even with the recent crash in that ratio, you are only down to the extreme peaks of the ratio in 2000 and 2008. It gives truth to someone’s observation that PM mines are holes in ground next to liars and it seems to be an apt description of perpetual gold bugs who herald a new era of gold strength when it is already far above an average price since the beginning of this century. Probably firm support for PMs near zero, unlike interest rates (LOL).

  4. archaic June 27, 2016 at 2:13 pm #

    just lost over a hundred grand, what’s the point of working for $50,000 a year when I lost almost three years of salary on one stock?

    This is a truly awful story that gets uglier every day.
    Certainly a great subject to meditate on…
    First world problems of having too much capital at disposal to play with
    may turn into real problems for someone.
    Perhaps stock market is not that great ‘creator of dynasty wealths’ it is supposed to be ?

    (VRX will likely be even better buy for a short term trade at 15$ or so)

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