Anton Emmanuel's Blog

Once lauded as an unstoppable growth machine, Valeant Pharmaceuticals has been mired in controversy and has seen its stock plunge over 70% over the last three months.  Needless to say, Valeant is struggling to gain traction from its precipitous slide.

To provide some brief context, Valeant’s mass sell-off was triggered by a report released by short-seller Andrew Left. The report alleged that Valeant was complicit in an Enron-like accounting scandal in which they were reporting “phantom revenue” trough a specialty pharmacy. The overarching claim was that Valeant’s reported revenue was not in fact in line with actual earnings. With the ghosts of the past still vividly in the minds of investors, many were quick to exit the uncertain situation—irrespective of the validity of Left’s report.

This story interests me because it underscores the true nature of volatile markets, but at the same time illustrates how volatility can yield viable investment opportunities.

As Professor Stone alluded to in class, stocks have both a tangible market value, and a perceived intrinsic value. The latter is relative to individual discernment. Analysts and investors often diverge on opinion when it comes to intrinsic stock value. And to be frank, although well-built financial models incorporating hosts of financial ratios are helpful, in my opinion, intrinsic value cannot be definitely measured. For instance, would an analyst creating a DCF outlook for Valeant in July 2015 been able to predict the landslide that would occur over the upcoming months—no. Conversely, although Valeant’s stock has been battered, does that take away from its strong cash flows, expansive geographic reach, and profitable subsidiaries? No. With that said, couldn’t it be argued that Valeant’s current price undervalues the business?

As a first year business student I am understandably an amateur when it comes to market speak, and my intention isn’t to call out seasoned investors. The point I am trying to reach is that market sentiment is not always based on hard facts. With the horror stories of the past still looming, investors often have an autopilot response to concerning market reports. In my opinion, this potentially yields an opportunity to capitalize on undervalued stock, and perhaps even realize strong returns in the long-term.

I posted a comment to Wall Street Journal blog on this article. (If my comment has not shown up, please allow for a few days, the administer probably has not approved it for display as of yet.)

Further information was sourced from this article.