Here are two more trades I made in the last month, with varying results:
1. Sold Almost Family last month at $19.50 (wrong call, as today it went up to $21.9)
Why? I sold after the CMS released its proposed rebasing for the next three years - it is cutting AFAM's and other home health provider's revenues by 4% per year, or 13% total. In addition, a law passed in September required that home-health aides earn minimum wage when they work overtime or spend many hours at the home of a patient. This will bring revenues down, and may bring costs up, making it very hard for AFAM to maintain its profitability. In addition, analyst Whit Mayo, who is thorough and has been correct on a number of calls regarding home health companies in the past, has an unfavorable view of AFAM's future. AFAM is trading at about 20x earnings. This was a difficult sale because I have owned AFAM for more than three years, and I trust their management and think they are doing an excellent job with the company. But the macroeconomic factors in the industry will make it hard for them to earn money for their shareholders. Today, the stock jumped 12% because AFAM agreed to purchase another home health provider for $75 million, which had $150 million annual revenues. This will bring AFAM's revenues to about $500 million. It will be interesting to see whether management can engineer profits in the tough climate over the next few years. Even though I sold, I would not wager money against them by shorting the stock.
2. Purchased UNTD on Nov. 1 at $12.91; sold today at $17.28.
Why? UNTD was an amalgamation of companies, including NetZero and Juno, internet service providers, classmates.com, and a phone-order floral company. On November 1, the company spun off the floral company, which became FTD. UNTD was left with the internet companies, classmates.com, and various other holdings. Before the spinoff, the company's market cap was about $800 million. The balance sheet had $120 million or so of cash and another $250 million or so of other equity. FTD accounted for about 70% of the company's revenues and 50% of operating profits, with the remainder accounted by UNTD ex-FTD. The company's revenues are shrinking, but FTD is growing. The equity, cash, and debt on the balance sheets after the spinoff would be (approximately) split between FTD and UNTD.
Immediately after the spin-off, UNTD went through a 7:1 reverse stock split, meaning 7 shares of UNTD became 1 share of UNTD, to prop up the stock price. Before the spinoff, there were 92 million shares of UNTD, and now there are about 13 million. Immediately after the merger, UNTD traded at $150 million market cap, while FTD traded at about $650 million.
That UNTD could have half of the cash and assets and half of the operating profits of the pre-spinoff company, and trade at less than 1/4 of the price of the other half (FTD) seemed a bargain to me. So I bought at just under $13. I sold today, because the company began to approach its fair value. I pegged the true value at about $20 per share, but sold early because I don't know enough about the management and the business is shrinking, so I didn't want to tie my money up there for a long time just trying to get another 15% out of the stock.
Lesson: One thing I am learning as I get deeper into trading is that you have to do a significant amount of research to find an irrational market price. Often, the reason a company's price-to-earnings ratio is low is that the company has bleak future prospects. Many people purchase stocks with low p/e ratios and call themselves value investors. But there is no formula or easy way to find an undervalued company, other than lots of research. And knowledge of management is very important in determine a company's future prospects.
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