UnitedHealth Group (UNH)

UniteHealth primarily provides health insurance in the United States.  This company has grown very rapidly in the last five years. Revenues have almost doubled from $ 23,454 in 2001 to $45,365 in 2005. At the same time, earning per share has almost quadrupled from $.70c to $2.48.
 
However, because of its size, growth is slowing down considerably. This year UNH is supposed to earn around $3/share or almost $4 billion dollars. Conservatively, earnings growth should be in the 10-15% range over the next 5 years. Plus, since it's an insurance company, it generates tons of free cash flow that will be used to buy back shares.
 
At 15 times earnings ($47), this company seems pretty cheap. The big hang over right now is an options scandal. The company stated that its sec filings should not be relied upon and that it will take "significantly greater" charge than prior estimates of up to $286 million. Once these charges are finally cleared up and the ridiculous amount of options granting is cleaned up, the stock should rise. The other possible hang over is medicare reform by the newly elected democratic party.

At this point, the stock looks cheap enough for me to buy. Because the growth rate  will be more tepid over the next 5 years, I’m using the same spread options strategy as I used when buying Home Depot. I bought a Jan 2009 $45 call and sold a Jan 2009 $50 call for a net price of $2.50 on Monday. If UNH stays above $50 on Jan 2009, my profit will be 100%.  

Dollar General

In my last blog, I mentioned that Dollar General (DG) might be a good retail investment. It was trading around $13.70-$13.80. Since then, it has jumped above $15. Unfortunately, I was waiting for a price below $13 to start picking up some shares. As a result, I did not pick up any shares.

However, it is still important to understand why Dollar General is a good investment below $13. The last year has been tough for Dollar General. They have missed same store sales numbers and will report earnings of $.90 this year as compared to $1.08 last year. But the important fact remains that there has been no dynamic shift in the industry. The dollar store format still seems like a viable business. The same store sales miss can probably be attributed to a variety of external factors such as high oil prices, etc... The miss could also be attributed to addressable internal factors such as merchandising issues. But the most important fact is that the business model is still viable. Also, add to the fact that Dollar General is a cash flow machine (like most retailers) and is buying back tons of its own shares, you have a good investment.

There is no magic formula to figure out when to start buying the shares. Generally, I like to buy the shares at 12 times the reduced earnings estimates.

Chico's and Dollar General

All great investors from Warren Buffett to Peter Lynch always stress the importance of thoroughly understanding the business before purchasing the stock of a company. Some of the easiest businesses to understand are the ones that you use in your every day life. My personal favorites from among those are retailers.

Besides the aforementioned fact that retailers are easy to understand, there is a definite methodology to investing in retailers.

Every first Thursday of each month, retailers report same-store sales. Same-Store Sales are sales dollars generated only by those stores that have been open more than a year and have historical data to compare this year's sales to the same time-frame last year. Basically, it compares how the company is doing this month to how they were doing in the same month of last year. Usually, if there is a sharp discrepancy between what is expected by analysts and what is reported by the company, the stock becomes very volatile (up or down). Usually, when a good company has a bad couple of months, it creates a nice buying opportunity for a vigilant investor. The important piece in that last sentence was that the company has to be good. If the business of the company is fatally flawed, you could potentially lose your investment. In most cases, the problems are temporary, unless there has been some dynamic shift in the industry.

A couple of months back, I picked up a women’s retailer called Chicos (chs). Chicos reached a high this year of around $50. At that point, it was trading above 40 times earnings (pretty high valuation, especially for a retailer). As investors realized that Chicos could not maintain its high earnings growth rate of the past, the stock started to go down. By August, it had missed some same-store sales numbers and was trading in the mid 20s or around 20 times this years forecasted earnings. Then in August, it reported a decrease in same-store sales number. This was the first time in something like 9 years that they had reported a decrease in same-store sales. The stock crashed all the way to $17 or about 15 times this years lowered earnings estimate. I picked about 350 shares around $17.91 with the hopes that it would fall farther and I could buy more. To be continued…

In my next blog, Ill explain the reasoning behind picking up chicos and describe a retailer that is almost ready to be bought in Dollar General (DG).