How We Knew Valeant Pharamceutical ($VRX) Would Blow Up

How did we know that Vale was a bad stock? Well, we did our homework, and we've been saying for a long time, honestly since June 2014, that the company was playing a shell game. They were getting people to focus on their pro forma or non-GAAP cash earnings when that was really the last thing people should be focusing on. They're very misleading. You can see here the big difference, billions of dollar difference between what they're telling you their profits were and what they really are. We weren't the only person that was negative on Valiant, but we were among the very few. It was such a big deal that they actually on SumZero, which is a buy-side only platform, so no sell-side noise, super high-quality stuff for the most part, set up a, what they call a face-off between me and another analyst who had a long idea. And so we put together a few bullet points, but you wouldn't believe like how how much my perspective in terms of don't pay attention to these non-gap earnings was shot down by these folks. If you read this face-off on Valiant between me and Navi Hehar from Mile 26 Capital, it's you'll see. He says, "I challenge anyone to present a cash flow forecast for Valiant that doesn't equate to an excellent compounding return at current prices." It seems that people have actually started to believe that non-GAAP earnings are real cash flows. They are not. All right. And I think today Valiant proved that. And by the way, I was, I was such a unique perspective on this that even Business Insider picked up the face-off as well, right? Talking off 2 sides of the argument, how different and how far apart we were, right? And they even stripped— they slimmed down my portion of the argument and gave the other guy, you know, more, uh, more, uh, more space. And so, you know, the big takeaway here is that, look, we're doing real work to protect investors. And even if the world is standing up against us, even if everyone's saying that we're crazy, that we don't even know how to actually calculate profits, as a lot of the bullish people against us said, we're going to stick by our guns because we believe that at the end of the day, Understanding return on invested capital is what matters most. If you've seen my webinar on return on invested capital, you've heard me talk about why return on invested capital is so important. We speak to why all the other metrics that people like to look at are not as important. At the end of the day, it's very intuitive. If the purpose of the capital markets is to promote the most efficient use of capital, it makes sense that the market would reward companies that that earn the most profit per dollar of capital with the highest valuations. I'm going to give you the most money because you make the most money. That's the way it works. So the key is, how do you measure return on invested capital? And the other key is avoid non-GAAP earnings. Here's a slide showing non-GAAP accounting and cash flow. It's a little while ago before we had more recent data. But that's because we've been analyzing this for so long. You know, we published this article, Dangers of Non-GAAP Earnings, last November. We've done 3 or 4 articles on non-GAAP earnings, specifically how they benefit executives and CEOs and potentially directors while running investors into the ground. We've documented this over the, over the, over the months and years. In pretty good detail. Non-GAAP earnings boost executive pay at the expense of shareholders, right? Performance-based compensation is based on these non-GAAP earnings. So what do you think executives are going to do? Are they going to drive shareholder value? Are they going to drive their paycheck? They're going to drive non-GAAP earnings. And if you are investing in companies that are paying executives based on non-GAAP earnings, you need to get out. Right. If you can find companies like AutoZone and Target that talk about return on invested capital, those are good stocks to be in. We put danger— we put Valeant in the danger zone again on February 29th. Back in June 2014, we talked about it then too. Oh, I gotta log in. Here you can see back in June 2014 when they talked— started talking about Allergan and the acquisition, we pointed out then this is not a good business. And they're talking about how they're well valued, stock is cheap, um, and when at the end of the day they're always going to get you to focus on metrics that they can manipulate. Not real cash flows. And that's really the big part of new constructs that adds value. We're going to give you the truth. We're going to focus on return on invested capital. We're going to explain to you why people aren't even, you know, why people aren't using it. We're going to explain to you exactly how we calculate it. We've got an entire education section dedicated to telling you what are the accounting loopholes. We're not keeping this a secret. There's 30+ white papers here on all the adjustments you got to make. There's details on all the metrics, return on invested capital, the things that drive return on invested capital and economic earnings. All our methodologies with respect to stock ratings, it's there. Fund ratings, there, right? The cool thing about our fund ratings, it's based on the stock ratings. So the better the stocks that are held by the fund are, The better the fund. It's not based on past price performance, it's based on the fund. We talk about what value investing is about. We explain to you how to do it. Step 1, step 2, step 3, step 4. We show you how our discounted cash flow model works. We give you examples of how to use it. And we have webinars just like this one that explain to you why we were able to protect our clients. It's about integrity. It's about focusing on what matters and not falling prey to the noise on things that don't matter. We helped our clients avoid Valeant not just today, 2 weeks ago, but over the last 2 years, just as we helped our clients avoid so many other danger zone stocks that have blown up in 2015 and this year. These numbers have gotten only better now that Valeant is really down, you know, another 50%. This was published back in the middle of February. The takeaway is diligence matters. If we're moving away from a momentum-based market, a technical-driven market where you got to study cash flows, there's no better firm to help you to do that than New Constructs.