The title sounds gimmicky, but that’s really what happened with Valeant (VRX) last night, popping up an astounding 27% in a single day, after missing analysts’ expectations and reporting GAAP losses in the FY16Q2 results!
I’ve previously mentioned how I’m excitedly looking forward to this earnings release, especially since I accumulated more Valeant back in July at $19 ++. (Portfolio Updates – 03/08/2016, My Thoughts On My Current Portfolio – July 2016)
A bit of history here: I started accumulating Valeant when it fell precipitously about a year ago, since then I’ve been adding to my stake…. and VRX has continued falling. Still, my investing hypothesis still holds true. I believe it’s oversold, and the markets are pricing in bankruptcy (although interestingly the bonds are no where near BK levels. It seems bond holders believe the company can repay the loans but shareholders don’t have such confidence?!)
Valeant alone accounted for the bulk of my portfolio’s poor performance in 2015. Still, I am heartened because things have progressed exactly how I expected it to be. The share price drop has been unexpected. The events thus far, has been expected.
I listened to the 2hr+ of live conference call to discuss the results, and that was very instructive in updating my thoughts. I won’t be going into detail about what I see in the company as there have been many many reports and this is a company that’s been dissected apart. Here are some additional stuff I gathered:
- The fact that it missed analysts estimates and still rallied so strongly tells me simply that 1) the analysts, as a group, are wrong on this and 2) Bankruptcy weighs heavily on the share price. Imagine it met analysts expectations. Now imagine if bankruptcy is off the table, and it met analysts expectations.
- Joe Papa has been fielding unsolicited offers for Valeant’s core assets. Although no hard info is given on this, it’s safe to say that the Bausch & Lomb assets would’ve many suitors. At $20, you are pretty much getting all other divisions for free.
- The company is responding to the complete response letter received from FDA, regarding the application for New Drug Approval for latanoprostene bunod ophthalmic solution. The company guided that they’ll be able to resolve this within 6 months. The concerns highlighted by FDA had nothing to do with the efficacy or safety of the drug.
- Valeant reaffirmed it’s guidance for the year of $9.9-10.1 billion in revenue, and adjusted non-GAAP earnings of $6.60-$7 / share. In addition, the company broke down how they derived estimates for these earnings. The guidance includes estimated loss of market share from “loss of exclusivity” from generics that’d challenge their 2 heart drugs, Nitropress and Isuprel. What caught the markets by surprise is the fact that management stuck to their full year guidance, and seemed resolutely confident in meeting the guidance.
- I am impressed by Joe Papa’s mannerism on the conference call. Despite being asked harsh questions, particularly by David Maris, Joe Papa replied calmly and logically. His mannerism on the call was completely different from his predecessor’s. Pearson was constantly in a rush, and obviously dismissive of all who called in with questions. In contrast, Papa took the effort to answer each and every question, even asking his management team to add on to anything he had to say.
- Valeant is planning to renegotiate their loan covenants (again) that will “put these concerns to bed” once and for all. No details have been mentioned, my guess is that the covenants would provide so much leeway that it no longer becomes a concern. Valeant may have to end up paying for that though. I’m not too enthusiastic about this development. I’m not too enthusiastic about anything that drains Valeant’s cashflow in fact.
Although I am satisfied with the Q2 results and the guidance for 2H2016, I will not be adding to my stake and in fact, have sold some out-of-the-money call options. Most are far out, and I expect them to expire, allowing me to collect nice premiums. That’s essentially what I’ve been doing the past year, lowering my average price.
A couple are not very far out, and I am expecting them to possibly be exercised. If so, that’s fine with me as well as I am not expecting a smooth recovery for Valeant. After they are exercised, it’d give me room to sell put options as well. (I’ve stopped selling put options as I have more than adequate exposure to Valeant already)
I am expecting much more volatility in the months ahead, and my plan is to capitalize on this via selling of both put and call options. Also, thus far, my exposure to Valeant is a bit on the high side relative to my overall portfolio, and will be glad to take some profit off the table.
Going forward, I expect Valeant will meet full year guidance, and the share price will recover in the next 2 quarters. My investing ties with Valeant doesn’t end there though, I’m expecting further share price gains after 2016 results, mainly from debt reduction. Eventually, I expect/hope Valeant will be one of my most successful investments. It’s certainly one of the most contrarian.
On a different note, I’ve been making good headway trading currency pairs. As mentioned in earlier posts, I do not view myself as an expert on Forex. Still, as I am already exposed to US currency risks from my US holdings, it makes sense for me to trade the particular currency pair when the opportunity arises. With the volatility that Brexit brings, there have been tons of opportunities.
The 2 main pairs that I utilize are the USD-SGD and the GBP-USD currency pairs. I’m happy to report that I’ve had considerable success, despite my self admission that I have no idea regarding the global macro picture.
IMHO, and this is really based on my personal experience, the best way forward in forex, is to focus on a limited number of currency pairs, and to look at the queue volumes. Stop-losses are crucial. I also don’t hold on to positions for very long, to limit risk