dimanche 6 mars 2016

Losing money

This comment was recently posted on this blog:

I am running out of patience on VRX (Valeant). I have not sold as I keep thinking we must be close to the bottom and see some value fundamentally. Only real accounting update is extremely insignifcant (10 cents less in 2014 vs 9 more in 2015) - but SEC investigation, terrible Management communication, delayed reporting, huge $30B debt is hard to remain positive. 

It looks like I'm gonna do so, but I don't want to defend once again Valeant. Because talking about this stock is like a conversation between muslims and christians.

I've "lost" a lot of money with Valeant. I haven't sold a single share, so money is not actually lost. But virtually, it is. And when you lose lots of money on the stock market, how do you react? Do you want to beat your wife and children? Do you feel suicidal?  Do you get depressive, seeing your retirement days vanish?

I keep calm. Well, for Valeant, I'm staying calm.

Here's a few things to think about when one of your investment is free falling:

1- Did the fundamentals change? Did your company started to lose sales or market share?
2- Is the money "lost" essential to your life?
3- What about other investors? What about superinvestors on Dataroma?

Here's what I think:

1- I don't think the fundamentals have changed with Valeant. This company is selling a lot of products and these sales are not that related to the name of the company (I doubt a lot of people will stop buying Bausch and Lomb products because of what's happening with Valeant). Maybe some sales were related to Philidor (the infamous pharma at the heart of the problem), but all indicates that the EPS of Valeant will be OK without Philidor. Frankly, I don't understand why that Philidor scandal went that far. For me, it's not worse than what happened with Whole Food Markets...;

2- Although I've "lost" a lot of money with my Valeant investment, I'm convinced that an overpessimism is above the stock. Maybe it was an overoptimism last summer when the share's price was someting like 4 times higher. But things went way too far on the other direction. Anyway, the money invested in Valeant is not essential to my life. I can still buy toilet paper (which is gonna be pretty useful in a couple of minutes).

3- Other investors are still buying Valeant. Lou Simpson added to his position recently (he added 38% to his Valeant position), just like Sequoia Fund (they added 13,50% to their very big position). I greatly admire Sequoia Fund. Anybody should read their annual letters which are to me more interesting than Berkshire's letter. Their team of investors is so great. And their comments on companies in which they invest are excellent. I have a great trust in Sequoia Fund and their holdings (Fastenal, TJX, O'Reilly, Mastercard, Google... and Valeant which is by far their biggest holding).You may hate Valeant, but I defy anybody to tell me that their others holdings aren't great.

Some people, including the guys at Sequoia, have said that Mike Pearson is an outsanding CEO. The guys at Sequoia said in 2014 that "you shouldn't bet against Mike Pearson". A lot of people would say the opposite these days, but I have more confidence in the guys at Sequoia than in the average guy on Seeking Alpha.

I believe that a guy like Pearson will know what to do when VRX shares are selling at 320$ or when they're selling at 80$. An astute guy could buyback large chunks of stocks or try to sell the company or find something that the average investor wouldn't. From what I've read, Pearson is constantly trying to improve shareholder's value.

Call it an act of faith. Maybe it is. Maybe I'm like those Russian soldiers in World War 2, going to a certain death with an empty rifle and thinking that my leader is an half-god. Maybe it's the case. But with the moral help of my hedge funds heros, I believe in my leader.

Which is the best cure for the mind when you're losing money.

7 commentaires:

  1. Thanks for posting to have a discussion on VRX.

    VRX just re-scheduled a Q4 earning on 3/15 (IF they don't cancel again...) so anything until then will have a lot of speculation.

    I agree that having Pearson back to 'clean his own mess' is good news. I interpret this as Ad Hoc Committee did not find him to have done anything illegal (i.e. fraudulant) - likely only very close to quite immoral/ethical (if you believe the likes of Charlie Munger).

    As I stated, any way you try to guessestimate 2016 EPS, it is hard to get less than $12, so there is most likely value. Unlike Nortel, VRX makes real money; there is a real business underneath the scandals.

    Anything but a terrible EPS downwards revision or admission of some SEC fraud investigation, the stock is likely to pop at least 25%. However, this is not light stuff. There are significant and legit risks here - so for me I prefer to be cautious. I hold but have not added. Depending how it turnarounds, I may stay with VRX 'buy and hold' or sell when multiple expands as confidence hopefully returns.

    Regarding TOP Hedge Fund support, I also get portfolio ideas from them - but I bad call / bad year can truly destroy many years of success. For example, Bill Miller was a legend in the US having beat S&P500 for 15 years but then he bought a bunch of financials too early in the 2008 credit crisis and got hammered with redemption (and as far as I know essentially retired with his reputation gone).

    For VRX has indeed very smart people as backers - starting with our best friend and target of this blog: Jason Donville. He had it in his January ROE letter as TOP idea no later than 2014! He replaced it by CXR this year. I am eager to see if someone asks him about VRX tonight and see how he feels about it (I may send BNN the question; hopefully he will take the question).

    Sequoia Fund is a legend fund - but putting 30% of their weight in any stock is serious concentration. I forget if it is them or another fund where they breached their own rule for single holding concentration and as a result 2 out of 5 Directors resigned. I believe in some degree of concentration (you need conviction to beat the index) but 30% is a LOT.

    PS: Constellation SW, my top holding, is almost getting into Top 10 weight in Sequoia Fund.

    In summary, I am holding but don't have the conviction to add until I see more as risks are real and high. I may miss an incredible opportunity but so be it. Let's see what Donville may say tonight and we can further discuss it tomorrow.

  2. Anyone ever tried to send a question to Market Call? I tried for the first time now on VRX for Jason but BNN email bounced back with the following...

    Maybe he will top pick it but otherwise, it would be good for him to have the question...

    Delivery to the following recipient failed permanently:

    Technical details of permanent failure:
    Google tried to deliver your message, but it was rejected by the server for the recipient domain bnn.ca by agmail2.ctv.ca. [].

    The error that the other server returned was:
    550 Too many invalid recipients

  3. Update: I removed the "-" and "/" in email title and email did not bounce. Let's see tonight... OK going to work so others can comment until then : )

  4. just my two cents worth...

    i have no cash in my portfolio so i can't act on anything but i find the excessive negativity surrounding VRX compelling. i have noticed that Bruce Flatt and the boys at Brookfield Asset Management have taken a position in this stock as of dec 31 2015.

    Bruce Flatt has been greatly influenced by renowned fund manager, Marty Whitman. They take particular interest in the balance sheet and managing assets thereof....Aversion and Opportunity are the flip side of the same coin.

    cheers, gavin

  5. For Jon: Market Call prefers to take tweets to emails for popular guests; a video would likely get thru also. Course if Jason doesn't want to comment on VRX he won't take anything on it as it's all pre-screened.

  6. Thanks Spanky! Yes, of course Jason will only discuss VRX if he wants to but I actually expect him to.

    Jason's honesty in discussing picks that have not (not yet) worked out is one of the things I admire most about him. Compare his insightful and open honest answer and opinion to some BNN guests who 'always sold their bad top picks two weeks after the recommendation with a stop loss only 5% lower while you sucker would have lost 40% a year later' (best example is Bruce Campbell's past top picks from a couple weeks ago) and it is night and day with Jason.

    Following Jason's picks have made me a lot more money (CSU, ESL, GIB, HCG, MTY) than realised (RFC) or 'paper' (VRX, CXR) losses. Jason is the best on BNN along with a few others.


    VRX's business model challenges (price increase vs volume) and acquisition inability (as share price tanked) came at a good time as they need to integrate their $11B Salix acquisition for one year ago. As long as no accounting fraud at Philidor, they should have good year-over-year growth with addition of Salix products and other recent acquisitions - giving time to their new Walgreen agreement to ramp up. Even without the problems, I would have been happy for them to pause acquisition and lower the $30B debt level. It should increase the multiple eventually as it de-risks the balance sheet.

    If they had found real fraud, the board could not have brought back Pearson. They need to issue audited Q4 2015 by March 31, so they would need to complete their internal review by then. You would think it must be pretty much done - but with the SEC on their rear end, VRX's auditors must be very nervous as they know the SEC will look at every 'i' and 't' in their audited financial reporting. Assuming VRX stayed legal with Philidor (we can debate ethical/moral later), the scritiny of next financial reports would be good as it should vindicate them faster. (PS: March 15 is only preliminary financial release, not 'audited' - but better than no updates!)

    Holder of VRX for now until further info provided to reassess my existing position. I added to CXR as I think it drops mostly as side collateral 'guilt by association' of VRX. CXR will be one of Jason's Top pick tonight; almost guarantee.

    Looking forward to tonight...

  7. Yeah, you're surely right: CXR is guilty by association.

    However, I don't understand why there's not massive insider buying for CXR and VRX.