Confusion Leads To Pacific Health Care Organization Sell-Off And Opportunity

| About: Pacific Health (PFHO)

Summary

PFHO has gotten clipped recently in sympathy with workers compensation company BBSI.

The selloff was based on an instablog that contains false information destroying the workers comp industry.

Seeking Alpha contributor Rochelle Jenks corrected the record and the selloff has created an opportunity to buy cheap.

On September 16, Copperfield Research published an instablog attacking Barrett Business Services (NASDAQ:BBSI). BBSI is provides services to businesses including helping them manage their workers compensation. 74% of BBSI's net revenues are now in the state of California. Sound familiar yet Pacific Health Care Organization investors (OTCQB:PFHO)?

In the instablog, Copperfield made the claim that California banned Professional Employer Organizations, or PEOs. Since BBSI is a PEO, the instablog asserts, BBSI would have its license revoked in the state of California and would see a collapse in earnings as a result. It sounds reasonable and scary right? Following this claim, BBSI's stock price itself collapsed about $9 per share or 16% on September 16 on around five times the normal volume and continued to tumble from there, currently down 30.60% since the instablog came out. Of course, there is only one problem here: Copperfield is completely wrong.

Seeking Alpha contributor Rochelle Jenks published a response in a Pro Article that systematically tore Copperfield Research's instablog apart. No, California isn't banning an entire industry (which PFHO is indirectly involved) or even anything even remote close. She quoted the actual language that Copperfield misinterpreted from the Senate Bill 863,

"Prohibits Professional Employer Organizations and temporary staffing agencies from becoming self-insured for workers' compensation purposes, and requires any of these entities that are currently self-insured to become insured by January 1, 2015. Specific employers will no longer be issued certificates of consent to self-insure."

In other words companies like BBSI as well as temp agencies are now required to buy workers compensation insurance for their employees just like most employers in California do already. No licenses are being revoked. No businesses or industries are being banned. But this confusion lead people to believe Copperfield's sloppy misunderstanding that the workers compensation industry in California was somehow doomed. BBSI's stock price fell off a cliff as a result. PFHO, as well, was right behind it and fell nearly as much in terms of percentage also on high volume.


BBSI and PFHO falling nearly lockstep on increased volume

No, the workers compensation industry in California isn't going away. PFHO's services which help businesses manage their healthcare costs, including bill review, are not going away. Even if PEOs were being banned, which they're not, I don't even think PFHO qualifies as one. It is moot either way. Coincidently, Paycheck PEO (NASDAQ:PAYX) happened to mention in a September 19 press release that it does business in California. I don't think I have to go out on much of a limb to conclude that the $16 billion market cap Paycheck PEO is up to speed on PEO regulations. Again, California isn't banning PEOs or Paycheck PEO wouldn't be disclosing that it is doing business there.

Warren Buffett once said, "The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." I'll add that the best type of pessimism is that which is misguided and a result of a gross misunderstanding and confusion related to a new law.

My advice? Thank Copperfield for creating the panic and low prices in BBSI and PFHO, and thank Rochelle Jenks for correcting the record. Buy both BBSI and PFHO. I am.

Disclosure: The author is long PFHO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in BBSI over the next 72 hours.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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