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Do you own Valeant Pharmaceuticals (NYSE: VRX)? Did you buy it at a much higher price? You may be wondering what to do, or how to avoid the same thing happening again.
When something hits your stock, you have to evaluate what happened. Valeant stock first got hit on Sept. 18 when Hillary Clinton tweeted about drug price gouging. Valeant stock fell from about $242 to $200. Despite this 17% decline, I think even I would have shrugged it off and considered buying on the dip. I don’t take politicians seriously when they say this stuff.
If you had a stop-loss order in place, you would have sold out and been able to decide if you wanted to get back in and set another stop-loss.
Valeant Stock Falters
On Sept. 28, the game changed. Citron Research, run by short-seller Andrew Left, issued a report. This came on top of Democrats wanting to subpoena Valeant for its pricing strategies. If you know Citron, you know it rarely gets things wrong. Andrew Left has been early, such as on World Acceptance Corp. (NASDAQ: WRLD). Sometimes the market doesn’t react, but historically when the market does react, the news is likely true and cause for concern.
If you were stopped out, good. If you weren’t and absorbed Citron’s article after market close, you either were able to get an after-hours trade in to avoid the 17% decline the next day or got caught with just selling on the open. The key, however, is that you must evaluate what Left had to say in context of everything else.
Through Oct. 21, Valeant stock fell another 15%. At this point, it may be tempting to buy back in. However, in the absence of new information, negative perception still owns the stock and you should stay out. If you are still in, well, now you understand why stop-losses can be helpful. Perhaps, however, you have kept the faith. It’ll all blow over, perhaps. But you’re down 50% at this point.
Collapse in Valeant Stock
On Oct. 21, Citron delivers a devastating blow with an article accusing Valeant of fraud and the stock falls another 26% in the next two days.
If you have not been using stop-loss orders, or even if you have and the stock fell after-hours, how do you handle this situation? Are there tips for what you could have done?
In my experience, you should abide by a general rule. If a big short-seller comes out with a report, read it and determine if it has merit. If it does, get out and stay out. If a stock falls more than 20% on news that is fundamental to the story, get out and stay out. If it falls for reasons that make no sense, or that you think involves a market overreaction, that will be your gut test. Buy more.
Steps to Consider
If at any time during a stock collapse, you get worried but aren’t sure what to do, try one of two things. First, short an equal number of shares to what you own. Now you’ve cancelled out moves in any direction. This buys you time to think and decide what to do.
Another choice is to buy put options equal to the number of shares you own. They will increase in price by the same amount as your shares fall, so your position is also neutral.
Finally, you can buy puts equal to twice the number of shares you own. That way you still make money back if the stock goes up, and you make money if it goes down.
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