The virtual Dark Horse Hedge portfolio is shorting SCHS...Crazy Train Market: SKH and SCHS
Heirs of a cold warThat's what we've becomeInheriting troubles I'm mentally numbCrazy, I just cannot bearI'm living with something that just isn't fairMental wounds not healingWho and what's to blameI'm going off the rails on a crazy train – Ozzy Osborne
Two stocks in particular have given me (Scott) cause to turn to Ozzy in an attempt to put into song what I am feeling. Monday started normally enough with Skilled Healthcare Group (SKH) reporting earnings. SKH is in the top quartile of all stocks in Sabrient’s VCU rankings and a holding in Sabrient’s Investors’ Hedge (IH) portfolio, so I was particularly interest in the company's earnings and future guidance.
Headlines from Reuters read “UPDATE 1-Skilled Healthcare Q4 profit beats Street estimates” which was no surprise given Sabrient's BUY rating and favorable research report. Q4 was reported as +$.31 versus +$28 expectation and $220 million in sales versus $218 million expected. The CEO had positive comments on the quarter and year: "We are very pleased with our fourth quarter and 2010 operating results which I believe reflect the outstanding effort by our clinical and support teams in managing through the extraordinary changes in the Medicare program during the period. I also continue to be impressed with the talent and passion of the individuals at our new hospice and home health agencies," noted Boyd Hendrickson, Chairman and Chief Executive Officer of Skilled Healthcare Group, Inc., "Consolidated revenue and adjusted earnings per share increased year-over-year in conjunction with the geographic expansion and revenue diversification from our hospice and home health care businesses, along with an increase in long-term care reimbursement rates."
Additionally, analysts from Credit Suisse, Jeffries and Citigroup raised their price targets. With this type news as the backdrop for the stock, SKH shareholders must have felt they were “living with something that just isn’t fair” as the stock tumbled -13% for the day. “What's to blame? I don’t know, but two days later SKH has fully recovered to close at $13.62, $0.17 higher than the close prior to the earnings release on Tuesday morning. In the meantime, SKH traded as low as $11.65 while “going off the rails on the crazy train.” The two day swing aside, SKH appears to be a stock worthy of consideration using Phil's buy/write strategy. The industry trades at an average p/e of 18.12 and SKH has a forward p/e of 10.84 at today’s close.
Just as I was watching SKH “recover” from beating estimates and having analysts pile on with higher price targets, another stock came on my radar for opposite reasons. School Specialty Inc. (SCHS) is in the bottom quartile of Sabrient’s VCU ranking and a SHORT in IH. So, again I was tuned in to the earnings, or lack thereof, on Thursday morning. The headline news stated “School Specialty reports higher 3Q loss”. The company didn’t guide higher for future quarters and just maintained its expectation of losing -$.30 to -$.60 for the year. The analysts weren’t too excited about 2012, as they have an average target of -$0.37 in losses on lower revenues than 2011. But investors apparently were so enamored with the loss, expectations of more losses, and declining revenue, that they bid the stock up almost 20% on the day. “Maybe it’s not too late” and the next 48 hours will normalize the effects of this report, just as was the case (inverted) as SKH.
Dark Horse Hedge is adding SCHS to its virtual portfolio as a new short position. It is currently trading at $16.18.
Have we truly gone off the rails on a crazy train when what is good is bad and what is bad is good? As I concluded writing this post, I see CNBC has a lead story titled, “What Will Kill a Bull Market? Good News”.