Valeant Has Bottomed but Don't Even Think of Buying Yet
Shares of beleagured drug maker Valeant Pharmaceuticals (VRX) have plunged more than 17%, falling from $22.42 per share to a recent 52-week low of $18.55 since I recommended the stock as a solid short candidate on June 17. At the time Valeant's chart pointed to lower lows, suggesting towards $20 or below was its next level of support. That's what happened.
The stock's recent fall translates to a total decline of almost 30% since I recommended selling on a "dead-cat bounce" on June 9. This was when VRX stock traded at around $25 per share. But it's now time to take some money off the table. Going neutral (being in cash) looks like the safer play.
Valeant's fundamentals, including its $31 billion in debt, could still pressure the shares, even with its Bausch & Lomb division providing some hope. At the same time, the charts have yet to send the "all clear" signal, which is needed to go long this stock. Meanwhile, a near-term bottom has likely been reached. Take a look at that chart, courtesy of TradingView.
VRX closed Friday at $20.44, up 1.5%. The shares are still down more than 18% since June 9 although the stock has risen more than 10% off its 52-week low of $18.55. Given its poor fundamentals, Valeant's technical metrics are now in control of the stock. Those technicals have slightly improved since my short recommendation on June 17.
While Valeant shares continue to trade well below their critical 20-day ($22.54), 50-day ($27.03) and 100-day ($39.45) moving averages, those metrics have adjusted to the stock's current level and continue to balance out. For instance, the current 20-day level of $22.54 now compares more favorably to the stock's current price of $20.44, creating a difference of only 9%.
By contrast, the difference was almost 15% on June 17 when the stock traded at $22.42, while the 20-day was at $26.30. The same scenario plays out and even looks better with the 50-day and 100-day averages.
This means, although VRX stock still looks broken, the metrics used almost three weeks ago to short the share are vastly disappearing. Combined with a strong 10% rise on its 52-week low, now's not a good time to bet against VRX. But this is not to be confused for a buy rating.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.