Growth and Value Stock: Valeant Pharmaceuticals

 

Stock Market Video

Growth and Value Stock: VRX

This Week’s Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, I point out that the big stories that have dominated investors’ attention for a long time—earnings season, the government shutdown and possible Fed tapering—have faded into the background. Without obvious catalysts for change, leadership in the market has changed hands. While the major indexes are still solidly positive, investors are showing a shift away from the growth stocks that dominated during summer and early fall. Momentum has shifted to slightly more conservative stocks, many of which pay dividends. It’s time to trust the charts!

---

Growth and Value Stock: VRX

The next stock in my series on stocks that have both growth and value characteristics is a treat to write about because it’s considered a buy by both Cabot’s growth advisories and Cabot Benjamin Graham Value Investor. That’s not the way it usually works, of course. By the time a stock has made a strong enough price move to be considered by growth investors, it has usually left its value analysts far behind it.

But Valeant Pharmaceuticals (VRX) is a long-term winner that was selected for Cabot Top Ten Trader back in early June, after the stock had gapped up from 74 to 88 on May 24, following that with a jump as high as 96 on May 25. Both days featured trading volume that was more than 10 times above the stock’s average. Valeant also featured a stable and growing lineup of drugs and had just taken over Bausch+Lomb Holdings.

By the time Top Ten Trader wrote the stock up, its price had fallen to 88, which represented about half of its gap-up gains. But the Valeant story (which I’m running below, minus its charts and fundamental tables, from the June 3 issue of Top Ten) was an attractive one, and investors soon came charging back into the stock.

Valeant Pharmaceuticals (VRX 88)

Why the Strength 

Ontario-based Valeant Pharmaceuticals has long been known as a consistently profitable company with a large book of approved drugs in dermatology (Zovirax and the Restylane family of products and many others), antidepressants like Wellbutrin and a host of others. The company’s stock has also been consistently strong, with eight write-ups in Top Ten over the years. Right now, the big news about Valeant is the company’s takeover of Bausch+Lomb Holdings, an eye-care giant that has been around for 150 years. The $8.7 billion deal includes $4.3 billion to pay off B+L’s debt. The takeover gives Valeant an immediate significant share of the contact lens and ophthalmic drug market, diversifying itself beyond dermatology. While the deal seems like a good fit, some analysts are worried about the combined debt that will result, noting that Valeant hasn’t paid its once-regular dividend since November 2010. At this point, however, the optimists outnumber the pessimists, probably aided by the company’s long-term record of profitable operation. Investors’ reaction to the takeover news was solidly positive.

Technical Analysis

VRX has been in a broad uptrend since late 2008, but the stock was tossed in the surf from April 2011 through December 2012, trading mostly sideways and unable to top resistance at 60 until January 2013. But lows kept rising, and the stock’s current rally can be seen to have begun last November when VRX was trading at 55. The stock had marched to the mid-70s earlier this month when the B+L news rocketed it above 90 on May 24 on very high volume. VRX has been using 90 as support since then. It looks buyable on any dip below 90, although any market weakness might lead to a pullback of a couple of points. Picking your spots might pay off here. A dip back to 80 would be bearish.

Suggested Buy Range: 86-89
Suggested Stop-Loss: 78-80

So how does a stock that has just finished a run from 88 to well over 100 come to be considered as a value stock?

I asked Roy Ward, our chief value analyst, to give me his thinking. Here’s what he wrote in the November 14 Special Features Edition of Cabot Benjamin Graham Value Investor.

Valeant Pharmaceuticals International (VRX: 109.73) Max Buy Price is 107.03; Min Sell Price is 157.22

Valeant Pharmaceuticals (VRX 105.44), based in Mississauga, near Toronto, is an international specialty pharmaceutical company that discovers, develops, manufactures and markets a broad range of pharmaceutical products. Valeant markets about 900 pharmaceutical products globally. The company has developed drugs in almost all areas of medicine with a slightly higher emphasis on neurology and dermatology products. Its drugs include prescription and generic brands.

The 2010 merger with Biovail tripled Valeant’s sales. The marriage has produced better than expected results and includes a vast array of products and marketing capabilities throughout the world.

Management is aggressively acquiring small companies with potential to quickly add earnings. Valeant has acquired 50 companies during the past four years. During the past 12 months, Valeant has purchased 12 companies, highlighted by the acquisition of Medicis Pharmaceutical (MRX) for $2.6 billion. The purchase is expected to be immediately accretive to Valeant’s earnings.

More recently, Valeant acquired Bausch & Lomb for $8.7 billion. The purchase will add to Valeant’s earnings per share instantly. I continue to increase my sales and earnings forecasts to account for Valeant’s purchases.

I forecast sales will increase 54% and earnings per share will climb 42% during the next 12 months ending 9/30/14. The price to earnings ratio of 20.2 is reasonable, even though the company pays no dividend. The balance sheet is solid, although debt is a tad high. VRX is high risk because of the stock’s high volatility and the company’s short history since its merger with Biovail. VRX is likely to rise to my 165.48 Min Sell Price within one to two years.

---

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: The world is full of good people who live lives beyond reproach, hewing to the dictates of society from grade school to the grave. Most of them do little to advance humanity. It's those who are different who create progress, and to the best of them, criticism is a sign that they are on the right path. In the investing business, likewise, if you follow the herd, your returns will be average, unworthy of note. It's those who dare to act differently who achieve outsize success.

Paul’s Comment: Maybe it’s because I drive mostly around north of Boston, but I see plenty of bumper stickers reminding drivers that, “Well-behaved women rarely make history.” I happen to know the woman who wrote that lovely sentiment, and I can assure you that she is very well behaved. But she also admires the lives of women who weren’t, and she writes memorably about them. As in the stock market, taking no risks in life brings no gains. Striving to be out of the ordinary, whether in stock investing or the way you live your life, can bring plenty of criticism … but also remarkable accomplishments.

---

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 11/11/13—Why Tesla is Going Down?

Tim Lutts, Chief Analyst of Cabot Stock of the Month, looks at the forces that are pulling high-flying Tesla (TSLA) back to earth. He also looks around for the next big winner and finds one attractive candidate. Stock discussed: Taser (TASR). 

Cabot Wealth Advisory 11/12/13—Two Undervalued Healthcare Stocks

Roy Ward, head honcho at Cabot Benjamin Graham Value Investor, writes about trading algorithms, the potential ills of computerized trading and how value investors can take advantage of the situation. Stocks discussed: Questcor Pharmaceuticals (QCOR) and Valeant Pharmaceuticals (VRX)

Cabot Wealth Advisory 11/14/13—How to Spend Less Time on Your Investing

Chloe Lutts Jensen, editor of Investment Digest and Dividend Digest, explores ways to make it easier to manage your investments, and decides that having a smaller portfolio may be the best way. She asks you to email her the number of stocks in your portfolio and why you decided on that size.

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory

Related Articles: 

Growth and Value Stock #1

Growth and Value Stock #2

Growth and Value Stock #3

Growth and Value Stock #4


Paul Goodwin can be found on Google Plus.

Headline News

Stock Picks

Tesla Motors

If Tesla ever begins to cut back on development and innovation costs, earnings will soar.

Alibaba

China seems to be raising up its very own version of Amazon in Alibaba (BABA.

Facebook

Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.

Cabot Wealth Advisory

What Fed Speeches Mean for the Stock Market Today

By Chloe Lutts Jensen on September 29, 2016

Four Fed presidents gave speeches yesterday, and every word was digested by the stock market in an attempt to better predict the Fed’s next move. With odds of a December rate hike now about even, how should stock investors prepare?Read More >

The Emerging Market Stock You Ought to Own

By Paul Goodwin on September 27, 2016

The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >

Tesla Model 3 vs. Chevy Bolt: Which Affordable Electric Car Is Better?

By Timothy Lutts on September 26, 2016

The Tesla Model 3 and Chevy Bolt are the first two affordable electric cars with a driving range of more than 200 miles. Let’s see how they stack up - and what they could mean to Tesla Motors (TSLA) and General Motors (GM) stock. Read More >