Valeant breaks one of Warren Buffet's most important investing rules

Warren Buffett has said time and time again that he invests in simple companies with vigilant leadership.

And it’s the lack of those that has been bothering investors in Valeant over the last few days, as the stock has been a total whipsaw.

On Monday the company said it would have to restate earnings, the market freaked.

Then management said their restatement was just a little $58 million blip (nothing to see here) and the stock is rising again.

In an interview to be aired on public television and on, Wally Weitz, founder and portfolio manager of Weitz Funds, said that he started shorting the stock after CEO Michael Pearson showed that he had a very cavalier attitude about management.

“…early on at a dinner with Mike Pearson…he said something. We asked, ‘How do you manage such a far-flung enterprise? You have businesses all over the world,’ and he says, ‘It’s easy. We just get people to run them that…we tell them, ‘Make your numbers or we’ll get somebody who will.'”

Weitz continued: “That was sort of chilling to me, because I think an awful lot of the corporate blowups over the years, whether it’s Enron or whatever, maybe start off as legitimate companies that are well run, but when there’s pressure from the top to make the numbers, sometimes people succumb to that and bad things happen. So I was sort of on guard about it.”

Valeant came under fire last October when accusations of malfeasance from a short seller combined with government scrutiny over the company’s low spending on R&D and practice of acquiring drugs and then significantly hiking their prices.

Valeant has since said that it will change its strategy, but Wall Street has its doubts as to whether or not the company will be able to generate enough revenue without hiking prices, and without its once-secret and now defunct specialty pharmacy, Philidor, distributing its drugs.

Analysts at PiperJaffray, were also turned off by this week’s experience experience, and their concerns again hark back to Buffett’s investing rules.

Here’s how PiperJaffray put it [emphasis ours]:

With Valeant announcing yesterday that it will delay filing its 10K due to revenue recognition issues related to Philidor, we believe that the shares will remain depressed for the foreseeable future, even though the valuation, with a current 2016 P/E of 6x our EPS estimate of $13.29 (assuming no further revisions to management guidance) may look attractive on the surface. The larger problem with VRX shares, beyond management credibility (or namely lack thereof) in our view is the unknown. Put another way, are there other issues (either additional accounting issues or malfeasance or both) that could be uncovered? After all, virtually nobody outside of the company had ever heard of Philidor a year ago. Given the myriad issues surrounding VRX, we are suspending our PT. We reiterate our Neutral rating.

Listen to the Oracle, people.

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