Valeant Pharmaceuticals (VRX) – Marketing Says “Sell Thursday/Buy Friday”
Let’s face it—portfolio management at most mutual fund groups has devolved to the point where you essentially mimic the index. If your favorite stock is weighted at 100 bps in the index, you may overweight it at 300 bps, but if you go to 500 bps, you face career risk if you get it wrong. Besides—who wants to risk getting it wrong? It’s so easy to make 6-figures by buying the index and letting the marketing department tweak your holdings for you.
Here’s what I mean by that; once a quarter, a fund’s positions are sent to investors. Regardless of the quarterly performance, marketing wants to show investors that the PM owned the “right” stocks. Even more importantly, marketing wants to show that the PM has avoided any high profile public implosions during the past quarter. I can’t think of a bigger recent implosion than Valeant Pharmaceuticals (VRX: NYSE). Between accounting restatements, insurance fraud, channel stuffing, executive resignations, covenant violations and a host of other issues, the shares have collapsed. I get the keen sense that no one has a clue what’s going on over there—including senior management, who stitched the company together with one part overpriced acquisition and 31 billion parts debt.
I’m enjoying a vacation on beautiful Nevis, drinking a Carib Beer and catching up on emails. If the attention of the investor community is approximately represented by my collection of unread emails, then it seems that the whole world is fixated on Valeant. The common theme of the emails, is that a number of well-regarded investors have been obliterated in the stock and they should have known better. From there, the context ranges from pity to outright glee as various managers get their comeuppance. It’s one thing to be wrong—a very different thing to be outspoken and wrong.
If you are running the marketing department at a large fund group, all you care about is making sure that some journalist doesn’t put your PM in the spotlight for owning VRX—the very public shaming of a number of venerable funds is enough to put fear into any asset aggregator. Sure, it’s in various indexes and you’re supposed to get a pass if you own a few shares to mimic the index, but that doesn’t mean that you NEED to own it. You can always dump the shares before quarter end and add them later on—or never add. At the same time, I’m sure there are plenty of funds that would like to buy Valeant Pharmaceuticals on this washout. Those funds are also being held back by marketing—even if the PM believes in the company, it’s better to start buying on April 1 and avoid having to answer unwelcome questions. Fund filings show what the fund owns at quarter end—not the price paid. You get no credit for buying at the bottom—better to buy it in April and hope that it recovers by the end of June.
So, here we are with one day left in the quarter, marketing is forcing funds to sell their last few shares and holding back new purchases until April. Very few people want to admit how sausage is made with someone’s retirement savings—but there’s nothing wrong with making money if you know the ingredients. A few years back, I made a quick score playing fund flows during “Index Fund Shopping Day.” This is likely to be a repeat.
I don’t know if Valeant Pharmaceuticals is cheap here—honestly, anyone who says that they understand the business is lying—including management. However, I know that barring new news, selling is going to abate by Friday and there is pent up buying. I don’t want to own Valeant Pharmaceuticals as the upside is uncertain, but don’t mind writing puts and collecting the premium as these two fund flows interact—especially as I’m paid so well. May 27.5 puts closed at 5.80. That’s a return of 26.7% for 7 weeks (5.80 (premium)/21.70(capital at risk of 27.50-5.80 of premium received)). While I may get this one wrong, I know that the odds are grossly in my favor due to the peculiar nature of how marketing departments run the show at large fund groups.