October 31, 2015

On Friday, the S&P 500 was down 0.5% and Toronto was down 1.9%.

Valeant’s decision to “sever ties” with Philidor (a company that it had an option to buy and which it consolidated and which therefore in a sense was part of Valeant) would seem to be basically an admission that the short seller was right. The short seller is in good measure vindicated by this action by Valeant.

Bill Ackman came out and compared the troubles at Valeant to American Express’ “Salad Oil Scandal” back in the early 1960’s which Warren Buffett made a fortune on by going in and buying after the fall in Amex’s share price.

I don’t think it is a good comparison at all. AMEX was purely a victim in the Salad Oil Scandal. Valeant is cast as villain in the present scandal.

After the Salad Oil Scandal had pounded down the price of America Express shares, Warren Buffett did research (he talked to his friend that owned a restaurant) and found that customers were still using their American Express cards as normal. He concluded that there was a strong underlying business there and that American Express would recover. He was so confident that he put about 40% of his partnerships money into the stock and made a huge return.

In the case of Valeant, customers have abandoned the part of its business that went through Philidor and it’s not yet clear whether these large institutional drug buyers might also abandon other Valeant companies. There is concern that doctors will be less likely to prescribe Valeant products. So, for many reasons Bill Ackman’s analogy is not a valid one.

I am looking forward to Q3 earnings reports from Stantec, Melcor, Boston Pizza Royalties and others in the next two weeks or so.

Stantec will benefit from the lower Canadian dollar but this will be offset by slowness related to the lower oil prices. Boston Pizza Royalties units have fallen significantly due in part to fears of lower sales in Alberta. On Friday statistics Canada reported that restaurant sales in Alberta rose about 1.5% in August after two months of decline. I view Boston Pizza units as low risk and I believe there is a good chance the price will rise in the short term. They may even report a distribution increase. Melcor has declined due to the oil price situational and will no doubt report lower lot sales. It may also report some mark to market losses on its rental buildings. It will be interesting to see how cautious they are on future sales. In any case, I believe its shares represent good value.