Late last evening, I decided to press the buy button and got myself 5 shares of Valeant(NYSE: VRX) at $26 a piece. Purchasing Valeant may seem like a strange choice baring in mind that I consider myself to be a dividend growth investor and Valeant pays no dividends to its shareholders. Furthermore, Valeant has been in free fall over the past 12 month due to accounting malpractices and we all know the adage about never catching a falling knife. Though Valeant may not come across as my ideal stock or may not even appear on my stock screen, I believe that the stock has been battered so much by all the negative press that it offers great value in this overheated market.
First let’s start of with the the reasons as to why Valeant stock has been in free fall and appears to be so cheap. The company has taken on tonnes of debt over the past few years to fuel its growth and expansion drive. About how much debt exactly? Approximately $30 billion! That’s 4 times its current market cap and 3 times annual revenues. Apart from its huge debt pile, Valenat has also come under scrutiny from regulators looking into the company’s business model; buying medicines and exploitatively ramping up the price.
Even though there are many forces acting against valiant right now, it important as an investor to recognise that this might be a good opportunity to buy into the company. The market sentiment towards the stock is so low at the moment that it appears that the current stock price already has any future bad news already priced into it. Why else would a company with a stable range of profitable products be selling at a P/E of just 3. Sure this can be a value trap but there is an enormous amount of upside as well. The current risk reward ratio the stock offers is one I am willing to take.
Another good sign for the stock is that one of Valeants biggest bears has gone long on the stock. Andrew left of Citron Research has been shorting the stock over the past year after calling the company ‘Enron-like’. His report back in October really put Valeant in the spotlight as it pointed out Valeants inflated sales and faked revenues. The shares have fallen 90% since then and Left has recently stated that the stock being left for dead is making it a great value play. In the investing world, the number 1 rule is to never follow someone else into a trade. But knowing that Andrew Left of Citron Research and David Tepper of Appaloosa Management are long on the stock gives some sort of confidence to my own research.
Valeant to me looks like a good deal at current prices. The company remains profitable and is looking to reduce its debt by selling its assets. Furthermore, the products Valeant sells, are very defensive and cash generative in nature. Healthcare products are immune to the wider ups and downs of the economy and are also insulated from consumer sentiment. With all the bad press Valeant is getting, it might be tempting to say that consumers will shy away from the product. This is one of the advantages of investing in pharmaceutical companies, consumers will still have to buy the product no matter how much they hate the company.
I bought 5 shares of Valeant (NYSE: VRX) for just over $26 each. Since I am a UK based investor, the total purchase was automatically converted to pounds sterling. I spent under £100 buying the 5 shares. The dealing fee was only £0.40 as I used degiro.
The commission taken by my broker, degiro, is really low and it just goes to show that you don’t need that much money to invest. My total price for 5 shares including the dealing fee comes to just under £100. Most people spend this amount on a single weekend which they already forget about by the time Monday comes around.
Cheap brokers like Degiro are a godsend as they allow you the ability to take small positions in companies that you are not 100% sure of. Most of my stock purchases as seen by My Journey are in the £1000 range in order to offset the usual £10 dealing fee I pay. But Valeant at present is not a company i would be happy to invest £1000 in. I think with the risk it offers, £100 is a good figure. If I lose it, it won’t be a big loss in the grand scheme of things but if the company comes out of this turbulent period in health shape, the gain could be really rewarding. This is one of those investments where the upside offers much much more than the potential downside.