Wall Street is known for always trying to come up with a solution to make investors feel comfortable. I’ve always thought it was better to educate investors on what can and will happen so that when your portfolio is down 10 or 15 percent, you don’t panic and sell.
The normal approach from Wall Street is to try to find investments that won’t lose principle (even though you may not need the money for years) and tell investors how safe they are, until, unfortunately, they lose money or realize they could have done better by taking on some short-term risk for a longer-term gain.
I’ve have been talking for a while now about bonds and how they are a bad investment. Wall Street, rather than try to educate investors on why stocks would be a good investment for the next three years or so, has come up with a “new” type of bond fund called the “unconstrained bond fund.”
At last check, the average of unconstrained bond funds was down just below 1 percent for the year, when the Standard and Poor’s 500 Index was up about 15 percent. But here’s the kicker: Unconstrained bond fund means exactly that. It’s like a free-for-all for the fund manager to pick any strategy or holdings that he or she thinks will be the best place to be, based on current economic conditions and interest rates.
When I’m investing in a company, I look at the cash flow, debt level, earnings and many other things to help me decide whether that is a good business that can weather the storm. With the unconstrained bond fund, well, you’re hoping the manager has a good crystal ball to see into the future of many unknown factors, including the economy and interest rates.
My recommendation: Stop worrying about the short-term portfolio moves and invest in some high-quality companies.
One possible high-quality company that caught my eye is WellCare Health Plans (NYSE: WCG). The company provides managed care services for government-sponsored health care programs and employs 4,460, with company headquarters in Tampa, Fla.
Unfortunately, the stock is trading close to its 52-week high of $73.42 and well above the low of $44.75; current price of the stock hovers at $71 to $72 per share. Three out of four of the valuation ratios look good for WellCare. First, the PE ratio over the last 12 months stands at 20.1, below the industry average of 25.3. Price to sales looks extremely good for the company at 0.4, compared with the industry at 0.90.
Price to tangible book value is 2.83, which is not much higher than the price to book value of 2.2, and the industry appears to be carrying a lot of intangible assets on its balance sheet since its price to tangible book value is not material.
Cash flow per share came in at 16.0, almost double the industry average of 8.9.
The company pays no dividend but did see sales increase by 24.4 percent year over year, well above the industry average of 6.7 percent. Earnings growth year over year is causing some issues for WellCare, falling 43.1 percent when the industry was up 2.3 percent.
I looked at the income statement and discovered that while sales did increase 24.4 percent year over year, what increased more was the line item “Losses, benefits and adjustments,” which rose 30.4 percent. If I were to invest my client’s money in this, I would want to know whether this is a continuing theme of increasing “losses, benefits and adjustments” or a one-time thing.
The company has done a nice job keeping its debt in check; it has equity of $1.4 billion yet the total debt is only $346 million. Compare the debt to equity of 24.7 for the company with the industry average of 26.4, and you may get the same comfort feeling I got when I saw these numbers. The return on equity could be a little better for the company at 11.8 percent, well below the industry average of 16.3 percent.
As I mentioned before about some costs increasing faster than sales, this did show up at the bottom line, with a net profit margin of 1.9 percent below the industry average of 3.4 percent.
Again, if you’re going to invest in this company, make sure you understand whether the costs will be going back down or staying at this new elevated level — or worse yet, increasing more.
Looking out to the year ending December 2014, the earnings per share estimate have increased to $5.49 from $5.39 over the last 90 days. With the stock price about $71, this means investors are paying only 12.9 forward earnings, not such a bad deal.
Looking at it another way, using a forward multiple of 16.5, the target sell price would be about $91 per share, almost a 29 percent gain, and if the stock falls just a dollar, you’re looking at a 30 percent gain. The peg ratio also looks good at 1.16.
Have a question or a company you'd like me to take a look at? Email me at email@example.com.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.