A wise person once told me that there’s no such thing as stress; it’s all in how you manage chaos. As an investor I love fear, distraction, emotion and chaos in the markets because these are the most frequent forces that help to create value in the stocks I purchase. While everyone else squirms in their seats wondering when & where the bottom might be found, I sit contently knowing that opportunities for value at this moment are likely more significant than any other time in which I’ve invested.
I missed out on actively investing after the tech bubble, when the markets dropped just after the tragic events of September 11th, 2001 and the following Enron/Worldcom scandals. For the most part I’ve been doing my best to locate and take advantage of value in a market where growth stocks, commodities and the almighty bull have pushed their weight around for the past few years. As I watch the Nasdaq Composite Index tumbling more than 24% since it’s high of just over 2800 last October, I can’t help but smile to myself.
I’ll be completely honest: I have difficulty placing value on stocks that aren’t under-valued. I can’t justify paying astronomical P/E’s, determining a NAV on a company without tangible assets or placing equity into a company that has yet to ever turn a profit. What I look for instead are companies I understand, opportunities that the market largely has ignored and stocks that fall amongst the criteria of my Value Rules.
Today Eugene Melynk publicly stated what he has likely considered in private for some time. Biovail’s largest shareholder has seen his stake of over 18M shares drop by over $240M (nearly a quarter of a billion dollars) in the past year and significantly more since the pharmaceutical company’s heydays. His proposal to nominate new members to the board of directors indicates that we’re about to get a good old-fashioned scrap started behind closed doors. The collective interests of large shareholders such as RBC, PH&N (recently bought by RBC), Renaissance Technologies, TD, BNS, Morgan Stanley & Francis Chou will have to be considered before any changes can be made or smaller groups of shareholders form any meaningful movement for change.
Some readers may be asking the question, “I thought you didn’t like BVF as a Healthcare or Value stock?” and wondering what context any of today’s released news has to do with that.
My answer: It’s all about the process.
When I look back on my SA on BVF that I’ve compiled over the past few years I notice immediately that nothing has really changed with this announcement or over the past six months. The newly announced “strategic review” where one drug development project has been cancelled really won’t reveal much of anything. A comprehensive review process is really just a situation analysis; but instead of an external review by an investor the process is done internally for the benefit of managers. If they didn’t know what was wrong before, they’re likely not going to find anything new now. Biovail’s main issues at the moment are that their products have come under increased competitive pressures, inventory turnover remains low and no change in upper management has occurred…Yet.
Notice that I used the word “YET”. It would appear at this time that job security will be a top concern of existing board members and chief executives. When I hear about a labour disruption (lock-out, strike, employee dissatisfaction) at a public company my Value Radar often signals immediately. Labour distractions not only affect productivity and internal operations of a company, but provide a continued distraction on management away from their core competencies. Performance suffers, quarterly numbers and profit projections are missed and the stock price often suffers over the short-term providing an excellent opportunity in an otherwise very well run company.
But labour disruptions don’t exclusively exist in the blue-collar segment among employees at a company. Job security is just as important to a person on the manufacturing line as it is for the senior executives of the company. Melnyk today is effectively stating that he wants the board FIRED; replaced or shook-up in order for the company to finally get its act together. As an investor who holds no company shares I couldn’t care less what happens with all this corporate posturing. But as a value investor this move has caught my attention immediately.
These distractions affect a company’s ability to operate from a productivity standpoint, but also from one of strategic strength. With the attention of upper management and the board of directors on this push for change by shareholders there is a strong possibility that this company will continue to underperform. Operations and the stock price might continue to falter before the right group of managers come in that can meaningfully turn this ship around and maximize shareholder value. If the existing group of managers can’t get the job done…bring on the WHACKING STICK.
This stock is now trading very close to my AAV that I’ve assigned its existing portfolio of products & patents, has impressive excess cashflows (with or without a dividend cut) and a fractured board. The potential loss of laggard managers and shuffling of priorities to reflect shareholder interests might be just what the doctor ordered.
It’s too soon to say for sure whether or not this stock will make its way into either my Value or Healthcare portfolio, but the move today provided the first catalyst I’ve seen that holds the key to unlocking potential value. Taking the company private, selling to a larger company or breaking up valuable divisions will not be off the table if/when new management enters the picture which holds no emotional ties to existing problems or projects within the company.
Amazing what losing a quarter of a billion will eventually help you to notice isn’t it?