Arsuron Papartassee's  Instablog

Cardinal Health (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. The company completed a unit spin-off, CareFusion (CFN), on 9/1/09. Any investors with shares of CAH at the end of August received 0.5 shares of CFN. As a result, CAH price was adjusted down to $25.11 on 9/1/09 from $34.58 on the previous day. Two weeks later, Goldman Sachs upgraded CAH to a "buy" rating from "neutral" with a target price of $31. The stock closed at $27.29 on that day.

 

I pitched Cardinal Health to my readers several times prior to this writing. The first was a simple technical look at this stock on 6/11, 7/11, and 8/20. What I saw then was a stock with great fundamental developing a strong technical pattern called "triple bottom". Today I pitch you Cardinal Health once again with the different view. If you purchased this stock without selling them as I did, you would have done very well. As an added bonus, you would've gained some shares of CareFusion which rose 10.5% since it began trading. So let's dig into the number.

I'm seen and hear many retail investors (people like you and I) contemplating about buying stocks in recent weeks. What they are interested in particular is the banking sector. The thought of buying Citi or Bank of America strike me several times. What kept me away? My inability to value anything on their balance sheet.  Even if I could, I do not believe them to be of true value (because the mark-to-model accounting method). Fundamental analysis aside, I can present you some analysis using my technical skill. The last thing I would hate to see is a friend or family to go out and buy bank stocks and to see their money get cut in half. So let's take a look at Bank of America (BAC) and Citi (C).

Bank of America (BAC)

This survivor acquired one of the biggest name in mortgage industry as well as a brokerage firm during the crisis. The chart tells an amazing story. The stock hit a low of $2.52 then rallied to $18.24. If you were able to catch the low and high, you would have gained 623.8%. What if you missed it but now looking at BAC and saw that it was at $48. At $16, could still gain 190% if the stock go to the high. As the student of the market, I can tell you that it will probably take a long time for this stock to test its high.

 

Abbott Laboratories (ABT) is a worldwide health care products provider. This 72.5 billion dollar company (market cap) employs 69,000 employees worldwide. One of their well known products include FreeStyle, which is a blood glucose monitoring system. There are more products Abbott sell that I do not know but I am less concern about that. What struck me most about Abbott is its valuation and its inability to move up during the bull market. This may be because momentum traders are trading names like Research In Motion, Apple, or Freeport McMoran. The less momentum, the easier it is for me to buy.

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I wrote about Nacco Industries Inc. (NC) back on 2/6/09 and 3/13/09 when the stock was trading between $20 and $40 range. Please note that during the time of the write up, the market went through a major breakdown. March 2009 marked the low in the equity market.

 

My original article on NC was about its valuation. The company was trading at a ridiculously low valuation based on the book value (asset less liability) of $50. The stock was trading at $37.75 or 25% below book value. The dividend yield was 6%. My concern then were the possibility of dividend cut and large amount of debt. My thesis was also on the inflation which didn't really materialize.

 

On March 13, the company reported a loss of $51.69 per shares. The headline might scared some people but a close look showed the clearer picture. Nacco was forced to take an impairment charge because of the stock market condition. Here is a statement from the 4Q08 conference call.

Because at one point Nacco was trading a little more than a quarter of their book value ($14 / $50), accounting rules forced Nacco to write down their asset value. Operations were fine and this was just a accounting "magic".

 

Nacco is currently trading around $60 with book value of $44.85 (1.38x book). Dividend for the last four quarters remain unchanged ($0.5175) and is currently yielding 3.4%. With negative earnings, they are paying their dividend ($4.3M/qtr) through existing cash of $178.80M. With large amount of debt and low earning, we will have to see how Nacco navigate this hard times. I expect the dividend to remain unchanged or for the company to raise it by a small margin.

 

If you purchased this stock based on my writing, I would recommend you taking profit. Risk of dividend cut remains. On the upside if you choose to hold this stock, a possibility of write-up is there. Those non-cash write-down in fourth quarter could be a catalyst for a stock to pop back to $80 or $100. You have to decide for yourself if you are brave enough to hold.

 

The charts below shows where Nacco was and where it is.

 

We are at a very important inflection point. Let me explain. The Dow reached a low on March 9, 2009 at 6,547.05. The Dow then rallied to a high on August 13, 2009 at 9,398.19. This is a 44% rally within 5 months time frame.
 

Now, I am going to take you back to the crash that marked the beginning of the Great Depression in 1929.
 

The Dow reached a low on November 13, 1929 at 198.69. The Dow then rallied to a high on April 17, 1930 at 294.07. This is a 48% rally within 5 months time frame.

I wrote about Meridian Bioscience (VIVO) on April 7, 2009. This stock was trading at $16.90 then with a amazing yield of 4%. The stocks moved up 27% and closed today at $21.60.  I do not have any explanation for this movement except that Meridian at 4% yield is undervalued and should be bought. The chart below shows the performance of Meridian since 4/7/09.

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