Thursday, August 05, 2010

August 5, 2010 It was so quiet today on Wall Street . . . . . .

BAGAKOAA; August 5, 2010 It was so quiet today on Wall Street . . . You could have heard a Mosque.

My new kindle I just ordered got me on the Amazon Kindle Junkmail list. Today’s told me about new periodical available for the device. The periodical is "The American Scholar". Heck I want to subscribe just to say I subscribe and leave a few issues laying around the house. The American Scholar, yeah, I like that. But I digress.

I did visit The American Scholar website to learn about the magazine and to see if I could read all the big words they might use. To my surprise, there was a great article about investing, by Professor William Quirk. It was called “Too Bad To Fail” and all in all a good article, but what I found really helpful was Quirk’s description of derivatives and synthetic collateralized debt obligations (CDOs). Anyway I highly recommend the article and I think the magazine.

I was driving into the office a bit late this morning listening to Tom Keene on Bloomberg XM radio and he was interviewing this guy who was pontification about free cash flow yield. Free cash flow FCF, being the operating cash (revenues less normal expenses) less the capital expenditures, and free cash flow yield being that free cash flow divided by the current market price of the stock.

If you have been reading the blog for any time at all you know we are huge proponents of using free cash flow as a critical gauge in identifying healthy companies. The person Keene was interviewing was hitting all of our sweet spots. Companies that use FCF to issue dividends, pay down long term debt and execute “clean” stock buybacks (“Clean” meaning not encumbered by existing or new options) are darlings as far as we are concerned. I was so intrigued by the interview, I was thinking that this guy is plagiarizing most of the ideas and content of William Priest’s book “Free Cash Flow and Shareholder’s Yield”. I even sat in the parking lot to find out who this guys was because they were referencing his book and I wanted to get the book as I could not see how he could have written a book so similar to the Priest book. Low and behold, it was William Priest that Keene was interviewing. If you are interested, I believe you can go to Bloomberg and get a podcast of the interview. And as we have in the past, we recommend the Priest book to anyone who is serious about buying stocks.

Mosque at ground zero.

In a story that sounds as though it is a SNL skit, the building of a huge Mosque at Ground Zero has been approved by “New York City Officials”. Really! Even I can’t make this stuff up. It gets better. The group behind the proposal Park 51, has been investigated by Homeland Security and the FBI for aiding terrorist in Pakistan and other points east. It gets better. The proposed Imam, Abdual Rauf (kinda like the head Rabbi of a mosque), is labeled an Islamic Radical. The project is expected to cost 100 million, but no one knows where the money is coming from Sharif El-Gamal who owns the land and building that will be rebuilt (So-Ho Properties) say he does not know where the money is coming from? The “New York City Officials”, might want to refer to their history books as in Islamic history, they build their biggest Mosques at strategic points of conquest. It makes you wish it were a SNL skit.

Coincidence, not linkage?

I do not believe in coincidence. In the last week or so, I have tripped over a company on Mad Money, The Financial Times, Investor's Business Daily, The Journal, and at least 6 e-mail alerts from various blogs. Except for AAPL, I cannot recall so much hype over a stock. Ok, there has been a lot of hype about BP and RIG, but I am talking positive hype.

I am doing some homework and what I am reading from so many sources seem to be to good to be true.

Do your homework and check out MHS. Medco Health Solutions, Inc., a healthcare company, provides clinically driven pharmacy services for private and public employers, health plans, labor unions, government agencies, and individuals in the United States and internationally. The company's products and services include clinical management that comprises coverage management and utilization management programs; and RationalMed service, which analyzes patients' available prescriptions, inpatient and outpatient medical and laboratory claim records, and engages physicians, pharmacists, and patients in making changes, as well as provides benefit plan designs. It also offers pharmacy management products and services, such as the Medco Pharmacy, a mail-order service; Medco Therapeutic Resource centers, which conduct therapy management programs to treat certain chronic conditions; Specialty Pharmacy Management that provides an enhanced level of care to patients taking specialty medicines to treat complex or chronic conditions; Retail Pharmacy Networks, which offer clients with contracted discount rates; Call Center Pharmacies that provide information and support to members using its mail-order service or retail pharmacy networks; and information and services to physicians and pharmacists, who provide service to the company's clients' members, as well as reimbursement services. In addition, the company provides Internet-based services, including Member-Oriented Web services that enable members to self-manage their prescription benefits; Medicare Part D Web services that support pre-enrollment and post-enrollment activities; Client-Oriented Web services that provide online access to the company's proprietary tools for reporting, analyzing and modeling data, clinical-utilization management and decision-support, plan administration, industry news, and submission and tracking of service requests; and Pharmacist-Oriented Web services. The company was founded in 1983 and is headquartered in Franklin Lakes, New Jersey.

The have a lot of debt at 4 billion, but revenue is growing quite large and very quickly. Now there were only two apparent reasons not to get into MHS. First they had a small number of large clients with almost half of their revenue coming from 10 customers. That is changing. The other down side is determining how the new health care legislation will impact operating cost. On the positive side, their systems provide a relatively large competitive moat. Because of the recent legislation, Medicare and Medicaid will expand by about 7% a year. Those are big numbers for MHS. As employment number improve, so will enrollments in insurance programs inuring to MHSs benefit.

It is selling at 23% off its 200 day moving average. There are quite a few 67-70 dollar target prices out there. It’s forward looking P/E is under 12 which appears cheap knowing what kind of growth the company can easily expect. Their price to book is about double the industry average which seems a bit rich. They do not throw a dividend. This looks like a 60 dollar stock selling for 47 with a possible upside above 80 in 12-18 months. Being cash poor at the moment, I like the January 2011 50.00 call if I can catch tomorrow at 1.00-1.05. That puts me in the money at 51, which I think is very doable.

I got my first anonymous comment post today.  I am flattered.  It took us to task about making fun of the President.  And pointed out how President Bush would have made some fun photos as well.  I get the Obama photos everyday, I do not have to go look for them, but in the interest of fair play:

"Ok we turn left at the 7-11, then straight for about 3 miles then left at the Catholic Church and then . . . . . . . ."

Ooops wrong Bush
Here ya go:

"Who let the Dog Out Who Who"
Photo Courtesy of Getty Images-I hope!

And yet another special moment from the POTUS Gallery:

"I know, I can't believe we got the Health Care Bill passed either."

Salve Lucrum


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