Shares of WellCare Croup (WCG) dropped sharply following an FBI raid of its Tampa headquarters. The Florida based company provides government sponsored health care services to Medicare and Medicaid programs in the United States. After the raid was announced trading of WellCare common stock was halted by the Securities and Exchange Commission. Shortly after the market open the stock resumed trading and gapped down 70 points. Things didn't get much better throughout the day as the stock closed down 72% ending at $42.67.
Despite the huge impact of the FBI's raid on stock price, company officials refused to provide details on the situation. They also requested that the stock resume trading as soon as possible. The lack of insight into the reasons behind the raid instilled fear into the minds of investors. It is likely that the raid was caused by violations of WellCare's contractual obligations with the government. Un-named sources stated that 40 percent of clients were denied coverage that they might have had. Furthermore, WellCare officials wouldn't respond to these clients being denied coverage. Based on these rumors, the stock was punished throughout the course of the day. Having already gapped down over 50% the stock managed to fade near session lows by market close. It should be noted that several "shady" and perhaps illegal activities occurred in the months leading up to the raid.
- A George Soros run private-equity fund completed a sale of its 70% stake of WellCare stock in August for $870 million from an initial investment of $220 million
- Company executives Todd Farha, Neal Moszkowski, Thaddeus Bereday, Paul Behrens, Adam Miller, Christian Machalik, and Alif Hourani dumped massive amounts of shares leading up to the FBI raid. (Source: InsiderCow.com)
- The stock dropped more than 15 points in the two days leading up to the raid.
Although George Soros' private equity fund sale of WellCare stock isn't necessarily alarming, it can't be ignored given the unknown circumstances of the raid. The most troubling part of this situation is the massive sale of stock by company executives. Looking at the public disclosure of insider sales we can see that insiders sold almost $3 million worth of stock just weeks before the raid. In fact, Neal Moszkowski dumped $1 million worth of stock just four days prior to the raid. In the past two years company executives have unloaded over $80 million worth of stock, $47 million in 2007 alone. These kinds of sales usually set off red flags to investors, but with WellCare stock steadily climbing investors seemed to put these sales on the back-burner.
click to enlarge
Now that the stock is down so heavily, questions are being raised as to possible undervaluation. However, valuation prospects will be hard to determine given the lack details provided by company officials. We do know that the company has $1.64 billion in cash and 41.7 million shares outstanding resulting in $39.31 per share in cash. With a closing price of $42.67 the company is presently trading within 10 percent of its book value. At first glance the stock looks like a compelling buy, however this might not be the case. Several reasons lead to that conclusion.
- The company is likely to face massive monetary penalties for Medicare and Medicaid fraud charges.
- Class action lawsuits are likely to occur regardless of the outcome of the investigation.
- Government contracts will likely be lost in the future drying up a large chunk of the company's revenue stream. Connecticut is already searching for alternative companies to take WellCare's place.
- A small chance of accounting irregularities occurring is possible as well.
If these four scenarios take place investors will be left with a company struggling to survive. Even a few of these scenarios occurring would justify the current stock valuation. On the other hand, the Medicare and Medicaid business likely being targeted, only represents 25% of WellCare's total operations. Assuming that one-fourth of the company's total business is wiped out a $60-$70 valuation would be appropriate. With all the uncertainties surrounding WellCare one thing is clear; executives need to release the details of the probe immediately. The current fear surrounding the company will only continue to put salt on the wounds of shareholders.