mardi 10 janvier 2017

Reversal of situation / turn-around

Do you believe in reversal of situations?

I don't.

OK, Apple did a spectacular turn-around when Steve Jobs came back in the late 90's, but you have probably 50 examples of a business going to the wall and hurting the wall for a business going to the wall and avoiding it. I don't understand why we should go for a risky situation with a business not safe/that tries to reinvent itself instead of a business that's selling the same thing for 20 years, away from media exposure (ex: Richelieu Hardware, LKQ, Ross Stores).

Today, we learn that Valeant sold 2,1 billion US dollars of assets to L'Oréal and to a chinese business. Wow, the debt of the company will go down... a bit. And so what? The debt may go down but the business is smaller too. And more than anything else, it doesn't look like a period where Valeant could sell it's assets in a position of strength. In fact, there's a pressure on Valeant which is comparable to the weight of the water at the bottom of the Mariana Trench. You should go there to understand what I'm writing. Some say it's not very comfortable.

There's so much business out there, why bet on a stock which has 10% of chances of success, whatever the price is (5-10-15 times earnings) when you can invest in a lot of quiet stocks that have never been related to any scandal or crisis and which has steady earnings... and that's avalaible at 15-20 times earnings? I know, I wrote something similar in the past, but today, a lot of people were writing about Valeant on Seeking Alpha, writing stuff like: "Shorts will cover their ass now!"

Come on, Valeant was toxic one year ago. It's radioactive now. It's a panic selling of assets due to popular and insider pression. It's not good. Look elsewhere and forgive Mike Pearson for his sins. Anyway, he will burn in hell for what he did.

Which brings me to my question: Do you believe in turn-around? If the answer is yes, which percentage of your portfolio is related to these turn-around?

4 commentaires:

  1. OK,I will bite because I just bought Valeant shares yesterday.The reason to buy a turn around is that if you are correct you get outsized returns."Contra The Heard" only does turn arounds and they have very high returns over a long period of time.The problem is it takes a tremendous amount of patience.
    There is information in your post that is not correct.The sale of Dendreon and the 3 derm products were not "fire sales".Both sales were at prices substantially higher than their cost.Quite the opposite,Mr.Papa has shown that he will not be pushed into fire sales.
    You state they have a 10% chance of survival.I am not sure why when they will make $5.50/share this year on 9.6 Billion in sales.They just raised prices on average 9%.An increase of 9% on sales of 9.6 Billion.How many co's can do that?
    Yes they are smaller.Everybody knows they have to pay down the debt and sometime you have to step back so you can move forward.
    They had a 7% y/y growth in some segments and a very positive Phase 3 trial.
    This is a great Canadian company with a world wide franchise that grew too fast and took on too much debt.They have a new CEO who has done what he said he would do,so far.
    You can't turn a ship this big around quickly but what can change is "perception".In the market sometimes perception is more important than numbers.
    I am very comfortable with this position and will probably add going forward.

  2. Here is an interesting quote that seems to address the subject of this post…

    ”We’re looking for businesses that are going through some kind of transition – in management, in the business mix, in the industry. Often a previous management team overextended and overleveraged the company and somebody new has been brought in to straighten it all out, by cutting costs, selling assets or paying down debt. A good business that happens to have bad balance sheet is much easier to fix than the opposite.

    James Rooney, Avenir Corp

    Now I’m not saying that Valeant is a good investment but it could be. The future is uncertain and from where we stand at this present moment in time the future is little more than a series of probability distributions. In other words more things can happen than will happen. I’m assuming that all the past bad news about Valeant has already been discounted into the price of its stock so to me it could offer an interesting contrary investment opportunity. This is what makes investing in the Stock Market so interesting. There are so many variables at play at one time. From my own experience I can say that it pays to be open minded about almost everything because the market itself is open minded and open ended and will not be pigeon holed into a certain way of behaving.

  3. 100% agree with Penatrator. Stay away from turn-around situations. The reason why is that the duration of time required to successfully complete a turnaround x the lower probability of success hardly ever compensates the investor for price paid relative to strong, growing businesses at higher multiples.

  4. Most people believe in Market Efficiency Theory (or MEH) to some degree, I’d put myself in that category. For that reason I wouldn’t invest in Coca Cola, because for all intents and purposes there isn’t much room (between what I see as fair value and the market) for me to make money and they’re also past their compounding days. That’s why turn-arounds are quite interesting. In most cases the market is being rightfully pessimistic of a turn-around, however other times the market is just wrong, that’s when an opportunity has presented itself. Turn-arounds do have more inherent risk by their nature, but proper due diligence and some reasoning can assess how probable a favourable outcome is. A good example is Ackman’s investment in CP, railroads are great businesses, they fulfill a vital societal need at a cost effective rate, have an incredibly strong moat in the form of government regulation preventing new competition, which gives them some pricing power and insurance they’re going to exist for a very long time. Hindsight’s 20/20, but it’s easy to see why this seemingly solid businesses, was underperforming primarily due to the incompetence of management.

    My model portfolio is about 15-20 names, equal weighted, each position is going to be about 5% with exception to BRK and MKL which I’m comfortable overweighting. More than half the names are going to be a variety of long term compounders with moats (like BRK, MKL, V, AMT, SPGI). While small cap names, turn-arounds, distressed plays etc are going to be more speculative buys based on what I think the market is inefficiently pricing (like CGC, CZO, FNMA).

    Most people are going to think I’m smoking something to think that CGC is undervalued. However, consider that Libs NEED to pass rec weed if they want a hope at a 2nd term, think of the implications of Canada being the first country to legalize weed and what that means for CGC as Canada’s largest company, defensive industry, growing demographic trend etc. I admit it’s a riskier investment, not for the faint of hearts, but it’s relatively reasonable to see CGC as a behemoth in the making or a prime takeout candidate. All the while lots of people on BNN can’t comprehend a 1 Billion MC, just astonishes me.

    Feel like I need to justify ^^ that to not look stupid.