Tag Archives: Valeant Pharmaceuticals

Valeant (VRX): The Short Seller’s ATM Machine

Valeant stock bounced today on the news that it had completed an internal review of its accounting issues with respect to revenue recognition and did not find any additional problems (Wall St Journal).   Famous last words there…VRX announced that it intends to file its restated financials in its 10-K by the April 29 “drop dead” date to avoid triggering a default under its bank covenants.

This Company smells more like an “Enron-esque” situation every day.  The revenue recognition issues connected to Philidor RX Services is just one of many issues.   VRX is a literal “roach motel” of bad business decisions, unethical business practices and, most likely, embedded fraud.

The stock popped up  21% in pre-market when the news report hit the tape.  As you can Untitledsee from the graph to the right (click to enlarge), it’s been selling off since the initial spike.  It’s likely that a few panic’d short sellers rushed to cover.  However, I would bet most of the move up in the stock was triggered by a bevy of retail daytrader stock jockeys who thought it would be a good idea to chase momentum.

While the Company may avoid a technical default under its bank covenants, this does nothing to fix VRX’s deep-seated problems.  It has $30 billion debt that was amassed from overpaying for its several acquisitions over the past few years.  It has a self-assessed book value of $6.4 billion, or $18/share.  BUT, after stripping away goodwill/intangibles, its book value is negative $32.6 billion.  Too be sure, most of that goodwill is attributable the amount by which VRX overpaid for acquisitions, some of which it is already looking to unload.  

One last point about the news that juiced the stock today.  The Company’s declaration that its financials are now valid is based on a review of the matter conducted by a committee that was composed of VRX’s board of directors.  In no way can the case be made that this review was in any respect independent or “arm’s length.”  This is another trait of a Company that is on the ropes:  self-declared exoneration.

Without a doubt, the path of VRX’s stock to much lower stock prices will be littered with news-driven price-spikes like today.   This is why VRX stock is a short-seller’s ATM.  Every spike can be shorted for short-term profits.  Make sure to hold on to some amount of a “core” position in order to profit from the next eventual new-driven waterfall.  This is how similar stocks before VRX – like Enron, Bear Stearns, Countrywide FInancial,  etc – traded until they finally dropped below $10.

I have no doubt that beneath the mess, VRX has a core business that is profitable.  But it is highly likely that core value of VRX’s enterprise is significantly lower that is implied by the current market cap.  Currently VRX’s June $17.50-strike put options trade at $2 and have an implied volatility of 1.477. This is a staggeringly high implied volatility and it reflects an imputed 35% probability that the stock price will be below $17.50 by the June expiration of the put contract.

The only problem I have with the idea of shorting VRX beyond price-spike daytrades is that the idea has not received the full “Cramer endorsement,” meaning Cramer has not issued a table-pounding “buy, the market is stupid” recommendation.   Other than that VRX is a daytrader’s dream ATM.

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