Chou RRSP Fund Buys Valeant

Fund acquires shares in troubled company

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Aug 31, 2016
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The Chou RRSP Fund (Trades, Portfolio) acquired a new holding in Valeant Pharmaceuticals International Inc. (TSX:VRX, Financial)(VRX, Financial) in the second quarter.

The fund purchased 260,000 shares in Valeant for an average price of 36.51 Canadian dollars ($27.83) per share. The transaction had an impact of 14.1% on the portfolio.

The Chou RRSP Fund (Trades, Portfolio) was established in 1986 and is managed by Chou Associates Management. The fund seeks long-term growth of capital and invests largely in Canadian companies. The fund does not emphasize short-term market factors when analyzing companies, preferring to look at balance sheets, cash flow and profitability, its position in an industry, special strengths, growth potential and management.

Valeant is a multinational pharmaceutical company based in Canada but is also traded in the U.S. The company manufactures generic pharmaceuticals and over-the-counter products.

Over the past several months, Valeant has been under investigation by the U.S. Securities and Exchange Commission for its involvement with drug distributor Philidor Rx Services LLC. On Aug. 29, the two companies were sued in a class action lawsuit by the New York Trades Council & Hotel Association and the Detectives’ Endowment Association of New York on the grounds that it had been overcharging for medications.

The pharmaceutical company has a market cap of 13.7 billion Canadian dollars with an enterprise value of 52.8 billion Canadian dollars. It has a price-earnings (P/E) ratio of 4.6. Its price-book (P/B) ratio is 1.9, and its price-sales (P/S) ratio is 1.01.

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GuruFocus ranked Valeant’s financial strength 3 of 10. Valeant’s cash-debt ratio is 0.03, below the industry median of 3.15. Its Piotroski F-Score is 4, indicating a stable financial condition. However, its Altman Z-Score is 0.4, placing it in the distress zone, which implies the possibility of bankruptcy in the near future. This is likely due to the current allegations and investigation surrounding the company.

GuruFocus ranked the company’s profitability and growth 7 of 10. Its operating margin is 7.7%, and its net margin is -9.6%. It has a return on equity (ROE) of -16.9% and a return on assets (ROA) of -2.1%, ranking it below other companies in the industry.

It is important to note that the fund purchased shares in Valeant in the Canadian market; however, Francis Chou (Trades, Portfolio), the fund’s founder, also holds Valeant stock in the U.S. market.

Bill Ackman (Trades, Portfolio)’s Pershing Square Capital Management is the largest shareholder in Valeant.

Disclosure: I do not own stock in any companies mentioned in the article.

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