A new homework, from John. John's new to investing at the young age of 75 and is interested in a company in the medical field. Read on. [I edited his letter for length.]
Hi Phil Town,
...I have been interested in the Medical Services field for some time. After I came home from the seminar, I started looking for stocks in the Med. field. I found United Health Group (UNH) among many. I understand that a lot of folks will be retiring soon, and that there are shortages in almost every category of medical services. UNH has apparently a long record of verifiable performance and shows a good line of growth.
The MOS for this company would come from the fact it stands out from its many competitors, and its potential increases in the med field of business. I could add more but want to keep a limit on the words. What do you think of my calculations?
- Current ttm, Zacks EPS $2.50
- Zacks Future Growth Rate 17%
- =fv(17%, 10 yrs, $2.50). Future EPS $12.02
- Future Stock Price (34 x $12.02 = $408.68
- Sticker Price =pv(15%, 10, $408.68) $101.02 per share
- MOS Price = Sticker $101.02 per share 50% = $51 per share
- Actual Price on was Feb 15, 2006 $59.00 and I am waiting
So in your opinion, would I gain a lot more, in terms of expertise, understanding, by investing time and attending the [Success] Workshop, or could just stay tuned to your Web Site and learn the same?
John
Here's what I said:
Hi John,
Sorry for the delay. I've been bound up with the book thing. RULE #1 comes out March 21st and I'm getting buried with PR requests. Could be worse, I suppose, but it's messing with my snowboarding season big time. Like right now the sky is blue, the snow is deep and I'm in here trying to catch up with you guys! But then again, seeing you get it is a blast, too.
Let me be the first to congratulate you on your fine Rule #1 job of business choices. You did the numbers very well using Investools, I see. The only suggestion that I have is that you change the PE multiple that you are using (you used the Rule #1 PE which is two times the estimated future growth rate of 17% -- 34).
I use the LOWER of the Rule #1 PE or the Historical PE. In the case of UNH in the last five years they have never had a PE above 26 and their stock trades in a PE range from 13 to 26. For projection purposes I'd go with the historical PE of 23. However, given the consistency of the 26 historically and the fact that the Rule #1 PE is not insanely high at 34, I'd be okay if you used 26 here but no higher than that. With a 26 PE (and all your other numbers are correct) the Sticker Price is $79 with an MOS of $40. UNH is selling for $56 today, pretty much right in the middle between "On-sale" and "Full Price". About half a Margin of Safety.
The good news is that for the last two months UNH has been going down like a brick. It hasn't had three greens since the first of November and if you caught that entry point, you got out right before Christmas on sideways, red, red at $64.
I don't know how far it will drop or why it's dropping -- whether it's the sector or the business that's out of favor -- but if I were me (and I am) I'd hope for this free-fall to continue down to my MOS and then I'd jump all over it at the first sign of green, green, green.
Thing is, though, that it's not likely to make it all the way down there. Last time it was at $40 was in late 2004. The reason it probably won't make the whole drop is that other smart people see this industry the way you do and will start moving their big fund money back in there as soon as they see the bottom feeders getting back in. I predict a stampede back into this one before it gets to $40. So what to do when we don't get the whole enchilada MOS?
First, remember the admonition of the Oracle of Delphi to Socrates: "Know thy business". (This is much easier than the other thing she said to him which was "Know Thyself", but I digress).
If we can't get a huge MOS before the big guys see the error of their ways and start jumping back in on UNH, we're going to have to be sure we know what we're buying. So have you read the annual reports for the last five years? Do you love the CEO and trust him to invest your retirement money wisely and on your behalf as the business owner (or do you fear he may be an empire-building traitor who will use your hard-earned capital to build a giant but sluggish business?) And you gotta gotta gotta know that UNH has a big moat so it can continue to grow at 17% as projected. And that takes looking closely at the Big Five Numbers. Are they consistent historically? Is the ROIC big enough?
And with that, back to your question about Investools class vs. my blog. We don't compete any more than John Deere competes with Ag School. Investools is a big wonderful tractor. It is technology that makes our labors less. The class is required to show you how to get the most out of the tractor.
By way of contrast: I'm teaching the fundamentals of good farming. You can apply what I teach even if all you can afford is a shovel. The reason I recommend Investools is that most people I speak to aren't retired and don't have the time to do the shoveling. They need a tractor or they ain't gonna be doing their own farming. And in this world, when you hire a farm manager, you rarely make money. It all goes to him.
Now go play!
