Two Under Valued Companies Trading at Their Cash Value

Without getting into the current Healthcare Reform issues. Here are two managed-care companies Humana Inc. and Molina Healthcare that are now selling for what they currently have in cash. Humana has nearly doubled off its march low while Molina is only up about 30 percent. Both have current ratio's above the 1.5 ratio, which is a measure of a company's ability to pay back short- term debt with its short term assets. A ratio of under 1 shows that they might be hard pressed to pay off any monies owed if it were due at that point. Molina is currently trading at 1x book value while Humana has a book value ratio of 1.28. Molina has increased its book value almost 5.5x since 2002

while Humana has increased theirs 3x which is a key measure that Warren Buffett looks for.Both seem to be consistent free cash flow generators another key measure that most value investors look for. Income investors might want to look elsewhere due to the fact that neither company pays a dividend.

Company	Symbol	Cash/share	Price as of 9/28/2009	Book value/share	Current ratio	P/E ratio	Market cap
Humana	HUM	$36.57	$38.03	$29.82	1.62	7.5	6.3b
Molina Healthcare	MOH	$21.59	$20.97	$20.94	1.88	9.4	537m

*The Molina family along with other insiders hold 51% of the stock. Currently 20% of the float is being shorted.

*Value Investor Bruce Berkowitz of The Fairholme Fund ($FAIRX) owns 9.5 million shares of Humana which represents a top ten holding for the fund.

Ignore The Headlines And Concentrate On Value Part II

As I said in my previous post concentrate on the fundamentals. We as investors are constantly bombarded with news via 24 hour news channels, the news paper and now that Ultra 24 hour news channel The Internet. Hey information is great and now we can receive more of it and at a faster speed than ever. As an astute investor one needs to turn off the hype and noise and concentrate on those fundamentals. I mentioned earlier terms such as book value and free cash flow, well their are other important things to look at when buying into a business. For example One of the most important profitability metrics is return on equity [or ROE for short]. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. If you think back to lesson three, you will remember that shareholder equity is equal to total assets minus total liabilities. It’s what the shareholders “own”. Shareholder equity is a creation of accounting that represents the assets created by the retained earnings of the business and the paid-in capital of the owners.

A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company’s return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor If you owned a business that had a net worth [shareholder’s equity] of $100 million dollars and it made $5 million in profit, it would be earning 5% on your equity [$5 / $100 = .05, or 5%]. The higher you can get the “return” on your equity, in this case 5%, the better.

Some businesses that cosistantly have high returns on equity are Philip Morris International $PM w/59% ROE, Johnson & Johnson $JNJ w/30% ROE, and Coca Cola $KO w/28% ROE.

Return On Equity is another investment metric used by many famed Value Investors such as Warren Buffett, Bruce Berkowitz, Mohnish Pabrai and many other notabe investors.

Slicing up Eddie Lamperts Pie!?$$$

I thought this might be a good time for an up date on Sears Holdings $SHLD considering they just released earnings yesterday of $2.94 excl items vs. estimate of $2.68. While the economy sank deeper into a recession Sears held up fairly well. However many financial media pundits talk otherwise. To the ones that are new to this story let me catch you up. Mr. Edward Lampert who is the Chairman of Sears Holdings runs a Hedge Fund- ESL Investments. The Hedge Fund or ESL has 16 stocks in its portfolio totaling over 7 billion with SHLD and AutoZone $AZO making up the lions share at 75%. Lampert bought into Kmart in 2003 and Sears in 2005 and merged the two companies. The company had success coming out of the box with the stock fetching as much as $195 a share. This was due to many investors thinking Lampert would sell off part of its large real estate holdings. This has not occurred and we all know what the economy has done over the last year and a half- tanked. Many investors jumped aboard this stock solely due to its real estate, that's fine but since the stock has gone south many bailed and seem to think Sears better days are behind them. As a retailer this may be true but as a potential Investment Holding company I think otherwise. Many large profiled investment companies have been in and (out) of this stock. Two of the larger players that have their funds money invested are the Fairholme Fund run by Bruce Berkowitz and the Third Avenue Fund fund run by the veteran Marty Whitman. With the economy in tough times this company along with the majority of others will take time to pay off or will it PAY off? Lampert states in his current news letter:

Sears will continue to evaluate opportunities based upon our expectations for returns and continue to experiment with a variety of options where the returns could justify higher levels of investment...

• Taking this approach a step further this month with plans to close its Joliet, Ill., Kmart store and transform it into MyGofer, a store where buyers can pick up their online orders. An estimated 80% of the facility will be dedicated to merchandise storage; 20% will be allotted for showroom space.
• The public launch of ServiceLive earlier this month is another example of how we are creating relationships with customers that empower them to manage their lives. ServiceLive.com is an online marketplace where homeowners and businesses can name their price for a wide variety of services, improvements and repairs.
  
• The company said Kmart, which has benefited from increased layaway sales to cost-conscious shoppers, increased its adjusted earnings before interest and taxes from the prior year.
• Reduced short-term borrowings on its $4 billion revolving credit line to $435 million as of January 31 from $1.9 billion at November 1, 2008.
• Plans to close 24 stores in addition to the eight already announced.
• Repurchased 2.9 million shares for $120 million and debt securities for $29 million during the fourth quarter
• Maintained strong balance sheet and liquidity position
• Cash balance of $1.3bil as of January 31st 2009 vs. $1.6bil February 2nd 2008
• Kmart began operating its own footwear business on January 1, 2009, which had previously been operated by a third party
  

Heres what Mr. Lampert had to say in a letter to shareholders

Relevent Articles

Sears Not Just Your Average Retailer STOCKMANMARC

Sears Is Holding Strong Todd Sullivan@ValuePlays

Sears Prunes Back To Conserve Cash Forbes

Buffett...Berkowitz...Lampert...Pabrai... And Focus Investing

What is Focus Investing? Does it mean staring at your stocks so long that you become cross eyed. No! Focus Investing is a style that has been around for many many years but it is not talked about much in the mainstream, only in value circles do you hear it mentioned. Its concentrating your bets, putting a large amount of your investment dollars or portfolio into your best ideas. Investors Mohnish Pabrai, Bruce Berkowitz, Eddie Lampert, and Warren Buffett have practiced this style, along with many other notable investors. The first three mentioned, Pabrai, Berkowitz, and Lampert practice this method very much today. For example, Eddie Lampert has 50% of his ESL Investments in Sears Holdings(SHLD) and another 20% in Autozone(AZO). Buffet however over the years has become more diversified owning roughly 90 public and private companies, not necessarily by choice but by the growth and success he's had. Both Pabrai (The Dhando Investor) and Joel Greenblatt (You Can Be A Stock Market Genius) mention focus investing in their books. Focus Investing also has to do with position sizing and what percentage you should allocate to each security, 5% 15% 25% or greater. This all depends on ones risk tolerance, and your expectations for upside(downside) potential. Pabrai has stated that ideally he favors putting no more than 10% of his total holdings in one individual security and only buying about 10-15 stocks. Here again this has to do with ones own personal risk level.
If you study many of the master stock pickers over the last 60 years you will see that they have used or use Focus Investing out performing the indexes.

Your comments or thoughts...

Mohawk Industries-A Positive Spin on A Negative Industry

The housing market has been in a downward cycle since topping out in 2005 and it is anyones guess when it will end. On a positive spin their have been plenty of housing related stocks that have been sold off hard. One in particular is Mohawk Industies Inc.$MHK. Mohawk is a leading producer and distributor of flooring worldwide that has a 125 year history. They sell to both residential and commercial markets which include ceramic tile, rugs, carpet, hardwood as well as laminate flooring. Through acquisitions and internal growth Mohawk has become one of the worlds largest floor covering suppliers and the country's leading recycler of plastic soda bottles(which become polyester carpeting). At the end of 2007 Mohawk and Shaw Industries(part of Warren Buffets Berkshire Hathaway conglomerate) controlled a combined 45% of the U.S. flooring market. Since only a handful of companies manufacture flooring this gives them high pricing power. Mohawks current price is $50 and trades at 5.5 times earnings with a Debt/Equity ratio .044, REO is 14% and a current book value of $73 share. Further management has a 19% stake and to boot Fairholme Capital and the Sequoia Fund have significant stakes which are two highly reguarded money management firms.

The author suggest current research before investing.