Valeant longs looking forward to less worse news this week!

In this blog I will discuss:

  • Why this is an important week for Valeant Pharmaceuticals shareholders
  • Positive and negative viewpoints
  • Weekly chart
  • Possible entry locations
  • Past and present trades

Supposedly, this is the week Valeant Pharmaceuticals will deliver on their promise to file the company’s 10K. A simple good faith filing without newly discovered and devastating financial results could send shares soaring. Most analysts know the company’s debt troubles and therefore have already priced the stock accordingly. There are fears that could support the bearish case if Valeant misses their June 11th time frame to file, or can’t follow through with filing this week.

Other fears that might drive Valeant stock down include the possibility that government will put a price cap on drug pricing. This would surely hurt profit margins but drug price caps haven’t happened yet therefore any short-side trade based on that assumption is simply an unfounded speculation. I do think price caps could be a problem but Valeant’s main opposition is Hilary Clinton who might not win the candidacy.

Some real concerns remain over Valeant bondholders restructuring the debt. Will they file bankruptcy? Right now I don’t see the bankrupt scenario playing out since bondholders would suffer losses. Small scale changes in debt repayment could be a positive catalyst for the stock if it helps the company build cash and sell assets.

Honestly we don’t know what will happen, but I think it’s unlikely they restructure in a way that would cause losses for stock and bondholders beyond losses long term investors may currently be sitting on. I also think government would love to get their grubby mitts on pharmaceutical profits and won’t jeopardize this by requiring devastating price caps that would cut potential profit on higher tax rates to pharmaceutical companies. This was recently proposed by Motley Fool as a reason why not to own Valeant, see article.

Moreover, I think future price action should prove or disprove these arguments as insider’s will load up or sell out before any big news hits the wires. Right now, it’s a little early for folks to be making extreme claims that support their bias view, which is not my intention, however I would be remiss to not share with you that I am leaning bullish on Valeant simply because the news has gotten less worse.

I’ve written before, the news going from horrible to less worse is a positive sign for the company, see article. Going from horrible to less worse might be a funny way to put it, but however you put it, it doesn’t change the fact that short-side traders got squeezed when this shift in news sentiment occurred on April 5, 2016. Just like then, they could get squeezed hard this week if Valeant’s 10K filing is well received.

Skeptics have gone as far as saying the recent shift from horrible to less worse news is a smoke screen, and the rug will be pulled out from under the stock once they file their 10K, or don’t! Despite much bad news this past year I’m taking a contrarian view and I don’t believe that Valeant is going to make new lows unless news gets worse.  For me, a break of the $30 and then $25 support zones would be ugly.  Unless something is truly wrong under the hood, the stock should bounce right off of those levels if tested. Given the inherent risk in this trade I only have on a small position and won’t add any new exposure until more news is out or price action confirms direction.

Interesting points of reference for traders this week might be the first touch of $VRX at or below $35. This would be a good spot to go long on a re-test from the gap support which held last Friday. If $VRX can’t stay above $34.90 and your scalping, remember not to let your losses add up or to scale into the trade small. Next interesting buy on dip levels are $33.40, $33 and $32.80. Anything below $30 is suspect, above $37 possibly bullish. Trading $VRX to me requires letting the price direction confirm your belief. Given the volatile nature of of this trade this can be even more difficult to do so tread lightly with your entries. Caution is advised, and swinging for the fences probably isn’t a good idea. If you are trading on margin you should know that $VRX has a higher margin requirement than most other stocks.

The weekly chart is showing a rising channel. I expect this channel to be broken to the upside once the 10K is filed but will be out of my trade if bad news sends the stock plunging I will be out!



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