When we sold United Healthcare (UNH) a few weeks ago, we did so with the intention of replacing it with something else from the Healthcare sector. We believe this is a thriving industry with good overall Return on Capital characteristics and the opportunity for continued future consolidation.
After a thorough look, we decided to take a position early last week in WellPoint Inc. (WLP), a “best-of-breed” health insurance provider and one of UNH’s primary competitors. WellPoint is the leading health benefits company in terms of membership in the United States and is an independent licensee of the Blue Cross Blue Shield Association, providing Blue Cross coverage in 14 states, including California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, New Hampshire, New York (primarily NYC), Ohio, Virginia and Wisconsin. The company provides coverage as UniCare in several other states. It is also one of the largest Medicare providers and the largest Medicaid provider in the country.
WellPoint also extends managed care plans to the large and small employer, individual, and senior markets. In addition, managed care services are provided to self-funded customers, including claims processing, underwriting, actuarial services, medical cost management and other administrative services. Other specialty services include pharmacy benefit management, group life and disability insurance, dental, vision, behavioral health, workers compensation and long-term care insurance.
WellPoint nicely meets our investment criteria for both EVA and valuation. Twelve-month expectations from the analysts we follow range from $78 by Goldman to $93 by Bear Stearns. Our model confirms a valuation somewhere in the middle of that range. We see this as a low-risk holding with significant upside over the next few years, and a good replacement for UNH.
We would like to take a position in one more Healthcare related company to participate in further consolidation and the growth evident in some of the mid-sized carriers. Healthcare stocks have substantially underperformed the S&P 500 this year and we would expect to see better performance in the near term. Most of this underperformance relates to the sell off in the weeks prior to the election, as the markets discounted the possible change in legislation from a shift in control in the Congress. Even though Medicare Advantage will likely be scrutinized, significant change is unlikely, especially in the next two years. Certain issues such as private fee for service (PFFS) plans are likely to receive most of the attention, but this is a smaller growth component for such companies as WLP. We feel comfortable that the returns on investment and growth incentives for healthcare companies will remain attractive, as the US population ages and innovative products for the uninsured become a focus for the private sector.
As always we welcome your comments.
Peter & Jack Falker
Note: At the time of publication, neither Jack nor Peter Falker, nor the clients of FalkerInvestments Inc. had any positions in UNH.
Note: At the time of publication Jack and Peter Falker and the clients of FalkerInvestments Inc. had positions in WLP.
Wednesday, December 06, 2006
Friday, October 20, 2006
Enough of UnitedHealth Group
Enough is enough! We have been very patient with our holding of United Healthcare (UNH) since April, thinking that the unquestionable strength of their franchise would ultimately outweigh their options backdating scandal. Listening to the comments of CEO William McGuire in the early months of the inquiry, we were reasonably sure that what had happened, while inappropriate and possibly naive, would likely not involve blatant wrongdoing on the part of senior management and the board of directors.
We were too optimistic. The internal probe commissioned by the company’s board of directors and carried out by William McLucas, former director of the SEC’s enforcement division, and member of the law firm of Wilmer Cutler Pickering Hale & Dorr (WilmerHale), was released on Sunday. It concluded that 29 of the largest options grants at UnitedHealth over a 12-year period most likely were backdated to benefit insiders. Quoting the Wall Street Journal: “The WilmerHale report suggests that Dr. McGuire misled lawyers conducting the probe of the options grants at issue…. To the end, Dr. McGuire insisted that year after year he actually did call or otherwise contact a compensation-committee member to set an options grant in motion on what, in hindsight, turned out to be a wildly favorable day. ‘Certain facts run contrary to this assertion’, the WilmerHale report says, citing memoranda Dr. McGuire wrote on or after the purported grant dates referring to possible grants in the future tense. The report also takes a skeptical view of the circumstantial evidence presented by Dr. McGuire to document that the compensation-committee notifications did in fact take place.”
The report also points out that William Spears, a member of the UNH board of directors and chairman of the board’s compensation committee during most of the period under review, had a personal money-management relationship with Dr. McGuire and that Dr. McGuire was an investor in Mr. Spears’firm (according to “Business Week” Stephen Hemsley, then COO and now CEO, had, in 2006, a $56 million money management relationship with Mr. Spears). It also points out that Mr. Spears was chairman of an ad-hoc committee of the board formed to negotiate management agreements with Dr. McGuire and Mr. Hemsley. The implication for us is that the “fox was guarding the chicken coop” and no on else on the board of directors, either knew anything or moved to do anything about it. It is very hard to believe that the board’s compensation committee, the audit committee and the ad-hoc compensation subcommittee, were completely in the dark about options backdating and the financial entanglements of Spears, McGuire and Hemsley. A careful reading of the WilmerHale report reveals implications of hand-written notes, e-mails, discussions etc. that no one can specifically recall. This is very reminiscent of the short memories of certain politicians when facing imminent legal actions.
Dr. McGuire and the company’s general counsel, David Lubben have agreed to leave the company and Mr. Spears has resigned from the board. Mr. Hemsley, who also benefited greatly from the options backdating, will become CEO. However, the WilmerHale report finds that Hemsley did not participate in the actual backdating. Both his and McGuire’s options will be repriced to make them legal, but neither of them is giving up any options or their attendant wealth. In addition, an independent corporate governance watchdog firm estimates that Dr. McGuire will be given a $6.5 million separation payment and $5.1 million a year for the rest of his life under the terms of his management contract. Regardless of what his contract might say, this to us would be compensation for blatant wrong doing and would be an unconscionable act by this board of directors. Are there to be no consequences?
We are certain that this is only the beginning of what will happen to senior UNH executives, the board and the company in general. Hemsley’s involvement is sure to be challenged, leaving an open question of who is capable of running the company in the future. On today’s conference call, the Goldman Sachs analyst (who has maintained a sell rating on UNH for the past several months) asked what could well be the 64 dollar question: “What have you heard from AARP about this whole corporate governance matter?” Hemsley’s answer was very carefully worded (in the negative) because AARP is a huge client for Medicare drug plans and a long-time critic of both political and business practices. UNH can surely expect to hear more from AARP and other major customers.
The WilmerHale report, both in its frankness and between its lines, establishes a strong starting point for the SEC’s ongoing inquiry, as well as the adjudication of the several shareholder lawsuits already filed and those sure to follow. Our feeling is that we would prefer to watch this as disinterested parties, without client capital exposed. For our long-time clients, UNH has generated a handsome gain over the years. For several more recent clients, it represents a loss. In either case, we will redeploy this capital to companies where risk is something we can manage, instead of being exposed to the future actions of the SEC, the Justice Department and the courts on UNH. Enough is enough!
Note: At the time of publication, neither Jack nor Peter Falker, nor the clients of FalkerInvestments Inc. had any positions in UNH.
We were too optimistic. The internal probe commissioned by the company’s board of directors and carried out by William McLucas, former director of the SEC’s enforcement division, and member of the law firm of Wilmer Cutler Pickering Hale & Dorr (WilmerHale), was released on Sunday. It concluded that 29 of the largest options grants at UnitedHealth over a 12-year period most likely were backdated to benefit insiders. Quoting the Wall Street Journal: “The WilmerHale report suggests that Dr. McGuire misled lawyers conducting the probe of the options grants at issue…. To the end, Dr. McGuire insisted that year after year he actually did call or otherwise contact a compensation-committee member to set an options grant in motion on what, in hindsight, turned out to be a wildly favorable day. ‘Certain facts run contrary to this assertion’, the WilmerHale report says, citing memoranda Dr. McGuire wrote on or after the purported grant dates referring to possible grants in the future tense. The report also takes a skeptical view of the circumstantial evidence presented by Dr. McGuire to document that the compensation-committee notifications did in fact take place.”
The report also points out that William Spears, a member of the UNH board of directors and chairman of the board’s compensation committee during most of the period under review, had a personal money-management relationship with Dr. McGuire and that Dr. McGuire was an investor in Mr. Spears’firm (according to “Business Week” Stephen Hemsley, then COO and now CEO, had, in 2006, a $56 million money management relationship with Mr. Spears). It also points out that Mr. Spears was chairman of an ad-hoc committee of the board formed to negotiate management agreements with Dr. McGuire and Mr. Hemsley. The implication for us is that the “fox was guarding the chicken coop” and no on else on the board of directors, either knew anything or moved to do anything about it. It is very hard to believe that the board’s compensation committee, the audit committee and the ad-hoc compensation subcommittee, were completely in the dark about options backdating and the financial entanglements of Spears, McGuire and Hemsley. A careful reading of the WilmerHale report reveals implications of hand-written notes, e-mails, discussions etc. that no one can specifically recall. This is very reminiscent of the short memories of certain politicians when facing imminent legal actions.
Dr. McGuire and the company’s general counsel, David Lubben have agreed to leave the company and Mr. Spears has resigned from the board. Mr. Hemsley, who also benefited greatly from the options backdating, will become CEO. However, the WilmerHale report finds that Hemsley did not participate in the actual backdating. Both his and McGuire’s options will be repriced to make them legal, but neither of them is giving up any options or their attendant wealth. In addition, an independent corporate governance watchdog firm estimates that Dr. McGuire will be given a $6.5 million separation payment and $5.1 million a year for the rest of his life under the terms of his management contract. Regardless of what his contract might say, this to us would be compensation for blatant wrong doing and would be an unconscionable act by this board of directors. Are there to be no consequences?
We are certain that this is only the beginning of what will happen to senior UNH executives, the board and the company in general. Hemsley’s involvement is sure to be challenged, leaving an open question of who is capable of running the company in the future. On today’s conference call, the Goldman Sachs analyst (who has maintained a sell rating on UNH for the past several months) asked what could well be the 64 dollar question: “What have you heard from AARP about this whole corporate governance matter?” Hemsley’s answer was very carefully worded (in the negative) because AARP is a huge client for Medicare drug plans and a long-time critic of both political and business practices. UNH can surely expect to hear more from AARP and other major customers.
The WilmerHale report, both in its frankness and between its lines, establishes a strong starting point for the SEC’s ongoing inquiry, as well as the adjudication of the several shareholder lawsuits already filed and those sure to follow. Our feeling is that we would prefer to watch this as disinterested parties, without client capital exposed. For our long-time clients, UNH has generated a handsome gain over the years. For several more recent clients, it represents a loss. In either case, we will redeploy this capital to companies where risk is something we can manage, instead of being exposed to the future actions of the SEC, the Justice Department and the courts on UNH. Enough is enough!
Note: At the time of publication, neither Jack nor Peter Falker, nor the clients of FalkerInvestments Inc. had any positions in UNH.
Monday, June 26, 2006
Big Oil
We have resisted taking a position in big oil for many years for two reasons: (1) None of the integrated oil producers/refiners were producing enough return on investment (ROI) to consistently create value for their shareholders; and (2) The business seemed too volatile, what with oil and natural gas prices bouncing all over the map, and political risks challenging foreign operations, thereby creating questionable risk/reward relationships.
However, things have changed with dwindling domestic oil and gas supplies, $70/bbl (plus) international oil prices, and the prospects of $3 per gallon (plus) gasoline as part of the permanent American life style. Quite simply, this means that the vast in-ground resources and producing assets of the big oil companies are now able to generate the kind of internal return on investment (ROI) that we have to see to interest us as long-term investors. Despite the political risks, which are not likely to ever go away, the value of higher-priced oil and natural gas, and permanently higher gasoline pump prices, have made the integrated oil companies much better long-term investments, in our view.
To add some perspective to our thinking, some analysts are saying that oil will drop to $50/bbl this summer. The oil analyst at Bear Stearns is using a $60/bbl assumption for 2006. However, oil futures are saying something else altogether, with a basing pattern in crude futures predicting a rally above the April high of $75.40. This gives rise to estimates among traders that crude oil will be headed above $100/bbl in the next 12 to 18 months. In any event, the probability that we will be seeing gasoline prices of $3 plus in the next several years, as a norm, seems like about 100% to us, especially when we consider that the Europeans, even countries with their own oil resources like Norway, are paying $5 plus at the pump.
The bottom line? Get used to it, and do something as investors that will allow us to cash in on the situation in the long term. We did our research, ran our valuation model on several integrated oil companies, and decided that ConocoPhillips (COP) is the big oil company we want to own. COP produced 17% ROI against a Weighted Average Cost of Capital of 10.7% in 2005, which nicely meets our EVA requirements, and our model conservatively indicates a valuation in excess of $80. The stock is currently trading in the low $60s, with a one-year forward P/E ratio of 6.5, pays a 2.4% dividend, and has a 12 month trading range between $57.05 and $72.50. Conoco is also using its very substantial free cash flow to aggressively buy back its own stock at these levels; something we really like to see.
ConocoPhillips is one of the largest integrated oil producers and its recent acquisition of Burlington Resources makes it the largest supplier of natural gas in North America. We were also pleased to learn that Warren Buffett has recently acquired a 17.9 million share position in the company (more than 1% of outstanding shares). We don’t always agree with Warren, but we think he is right on his oil and natural gas strategy, especially his choice of COP.
Jack and Peter Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long COP.
However, things have changed with dwindling domestic oil and gas supplies, $70/bbl (plus) international oil prices, and the prospects of $3 per gallon (plus) gasoline as part of the permanent American life style. Quite simply, this means that the vast in-ground resources and producing assets of the big oil companies are now able to generate the kind of internal return on investment (ROI) that we have to see to interest us as long-term investors. Despite the political risks, which are not likely to ever go away, the value of higher-priced oil and natural gas, and permanently higher gasoline pump prices, have made the integrated oil companies much better long-term investments, in our view.
To add some perspective to our thinking, some analysts are saying that oil will drop to $50/bbl this summer. The oil analyst at Bear Stearns is using a $60/bbl assumption for 2006. However, oil futures are saying something else altogether, with a basing pattern in crude futures predicting a rally above the April high of $75.40. This gives rise to estimates among traders that crude oil will be headed above $100/bbl in the next 12 to 18 months. In any event, the probability that we will be seeing gasoline prices of $3 plus in the next several years, as a norm, seems like about 100% to us, especially when we consider that the Europeans, even countries with their own oil resources like Norway, are paying $5 plus at the pump.
The bottom line? Get used to it, and do something as investors that will allow us to cash in on the situation in the long term. We did our research, ran our valuation model on several integrated oil companies, and decided that ConocoPhillips (COP) is the big oil company we want to own. COP produced 17% ROI against a Weighted Average Cost of Capital of 10.7% in 2005, which nicely meets our EVA requirements, and our model conservatively indicates a valuation in excess of $80. The stock is currently trading in the low $60s, with a one-year forward P/E ratio of 6.5, pays a 2.4% dividend, and has a 12 month trading range between $57.05 and $72.50. Conoco is also using its very substantial free cash flow to aggressively buy back its own stock at these levels; something we really like to see.
ConocoPhillips is one of the largest integrated oil producers and its recent acquisition of Burlington Resources makes it the largest supplier of natural gas in North America. We were also pleased to learn that Warren Buffett has recently acquired a 17.9 million share position in the company (more than 1% of outstanding shares). We don’t always agree with Warren, but we think he is right on his oil and natural gas strategy, especially his choice of COP.
Jack and Peter Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long COP.
Tuesday, June 20, 2006
Misery Loves Company
More on Option Backdating
The announcement over the weekend that Home Depot (HD) backdated stock options in what appears to be an almost identical fashion as United Health Care (UNH) seems like pretty good news to us.
About 40 companies are currently under investigation by federal authorities looking into whether firms backdated options or otherwise gamed their timing to benefit insiders. In addition to Home Depot, that number also includes Microsoft.
The “Wall Street Journal” reported last week that Microsoft had previously disclosed to the SEC that they had engaged in a form of backdating before 1999 and had voluntarily stopped the practice at that time. Microsoft awarded options at monthly lows each July from 1992 to 1999, with varying dates, and also routinely issued options to new employees at the stock's lowest closing price in the 30 days after they joined. Those practices, which Microsoft ended in 1999 after seven years, amounted to a variation of backdating, since they couldn't be priced at the low for a month until the month was over. The big difference, of course, is that Microsoft voluntarily stopped the practice and disclosed it. In a news release issued on July 19, 1999, the company said it was ending the monthly-low policy and taking a $217 million charge.
It seems to us that these recent revelations are good news for UNH because, in this case, misery should indeed love company. Apparently all of the boards of these 40 companies approved these practices and all of the public accountants and lawyers signed off on them for many years until the Sarbanes-Oxley Act of 2002 apparently put a stop to it.
Does that make it right? Certainly not, but it seems like the whole options backdating issue could end up being pretty inconsequential, given its prevalence. In that case, the market will go back to looking at the fundamentals of each company’s franchise, and that will definitely benefit UNH. However, we still want to hear about the result of their internal investigation, before we take further action. We would expect an announcement sometime in the next month, when their second quarter results are made public.
Stay tuned.
Jack Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long UNH.
The announcement over the weekend that Home Depot (HD) backdated stock options in what appears to be an almost identical fashion as United Health Care (UNH) seems like pretty good news to us.
About 40 companies are currently under investigation by federal authorities looking into whether firms backdated options or otherwise gamed their timing to benefit insiders. In addition to Home Depot, that number also includes Microsoft.
The “Wall Street Journal” reported last week that Microsoft had previously disclosed to the SEC that they had engaged in a form of backdating before 1999 and had voluntarily stopped the practice at that time. Microsoft awarded options at monthly lows each July from 1992 to 1999, with varying dates, and also routinely issued options to new employees at the stock's lowest closing price in the 30 days after they joined. Those practices, which Microsoft ended in 1999 after seven years, amounted to a variation of backdating, since they couldn't be priced at the low for a month until the month was over. The big difference, of course, is that Microsoft voluntarily stopped the practice and disclosed it. In a news release issued on July 19, 1999, the company said it was ending the monthly-low policy and taking a $217 million charge.
It seems to us that these recent revelations are good news for UNH because, in this case, misery should indeed love company. Apparently all of the boards of these 40 companies approved these practices and all of the public accountants and lawyers signed off on them for many years until the Sarbanes-Oxley Act of 2002 apparently put a stop to it.
Does that make it right? Certainly not, but it seems like the whole options backdating issue could end up being pretty inconsequential, given its prevalence. In that case, the market will go back to looking at the fundamentals of each company’s franchise, and that will definitely benefit UNH. However, we still want to hear about the result of their internal investigation, before we take further action. We would expect an announcement sometime in the next month, when their second quarter results are made public.
Stay tuned.
Jack Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long UNH.
Thursday, June 08, 2006
Backdating Backlash
We have a substantial position in United Health Care (UNH), which, even at current levels, has doubled in value over the last few years. When the Wall Street Journal revealed in April that a probe had been initiated into the company’s practices of issuing executive stock options at prices that were essentially “too good to be true”, we decided, as long-term investors, to wait and see what would happen. Subsequently, this practice has been identified as being more widespread, so UNH is not alone in the SEC probe. We believe that UNH is the best company in the HMO segment of the health care industry and, right or wrong, we have not been anxious to hit the sell button, as so many investors (including, we are told, Fidelity Investments) have already done. This scandal has significantly lowered the price the market assigns to the company; however, we do not believe that it has substantially changed the value of the company’s extraordinary healthcare franchise.
Here’s what we know at this point: Based on a chart we got from Bear Stearns, UNH has had 16 option grants since 1994, four of which were issued on the exact date of the low close in the quarter; three of which were also lows for the year. The dates were 4/20/94, 10/27/97, 10/13/99 and 3/8/00. Using Big Charts, we went back and created the charts for the several months surrounding each of those grants. Interestingly, the first two just look like good calls on the part of management. The stock had been tanking for several days so they picked a day they thought would be close to the low and authorized the options. It also appears they might have known that some good news was about to be announced, because in both cases the stock went up significantly in the next week. Unfortunately, that pattern does not follow through on the last two grants in 1999 and 2000. In both cases, the stock had been trending lower, they picked the exact date of the low, and the stock slowly began to improve from that point. It would have been virtually impossible to choose those exact dates, so backdating seems quite likely. In their 10-Q SEC report filed in May (which under the circumstances would have been blessed by their auditors), they say that “the Company has identified a significant deficiency in its controls relating to stock option plan administration and accounting.” The context that follows implies that the board had given some sort of blanket authority to management and that the authority had been misused by someone in “the Company’s human capital, finance and legal departments”, which, of course all report to Bill McGuire, the CEO and largest stock option beneficiary. The 10-Q goes on to say that the board has changed all of that and it won’t happen again, because future option grants “are to be made by the Compensation and Human Resources committee, and no authority to grant options is delegated to management.” In other words, the fox is no longer guarding the chicken coop.
As a former corporate treasurer, I’m in shock about what UNH apparently did, and why. My first reaction, when the probe was announced in late April, was that it would not be at all difficult for the management of UNH to grant options at or near the low trading points in their stock. Assuming that they did it the way we always did, options are very easy to grant with a telephonic meeting of the board compensation committee, to be ratified by mail etc. I saw it done frequently and it was entirely proper, albeit opportunistic. In UNH’s case, with board authority apparently already making it so easy to grant options, at or near a low point, why would someone in management engage in backdating to the exact date of a low? At the least, this is very greedy, and at the worst it’s outright fraudulent, not to mention stupid. In any event, if backdating is proven, Bill McGuire would likely have to take responsibility and he likely will not go unpunished. That could be messy, a la Ace Greenberg at AIG. Greedy CEOs have been kicked around a lot lately and it probably isn’t over yet.
Reading between the lines of UNH’s recent SEC filing, it seems that they have pretty much acknowledged irregularities, so it’s just a matter of time before the full story will be released in another SEC filing. The company’s board has hired the former enforcement chief of the SEC, who has a reputation as a very tough lawyer, to conduct an investigation into exactly what happened. This very constructive move was announced more than a month ago, so it’s likely that a report will be forthcoming shortly, and that’s when all the information should be available for decision making. If it’s not any worse than what the company has already reported to the SEC, we will keep the stock and consider adding to it at current levels, which represent a substantial discount from what our model tells us the ongoing franchise is worth in the longer term, with or without Bill McGuire. However, if the news is worse than what we currently know, we may have to quickly protect our capital.
Trading action in the stock during the last week or so seems to indicate that the street believes the worst news is already out. We will wait and see. Stay tuned.
Jack Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long UNH.
Here’s what we know at this point: Based on a chart we got from Bear Stearns, UNH has had 16 option grants since 1994, four of which were issued on the exact date of the low close in the quarter; three of which were also lows for the year. The dates were 4/20/94, 10/27/97, 10/13/99 and 3/8/00. Using Big Charts, we went back and created the charts for the several months surrounding each of those grants. Interestingly, the first two just look like good calls on the part of management. The stock had been tanking for several days so they picked a day they thought would be close to the low and authorized the options. It also appears they might have known that some good news was about to be announced, because in both cases the stock went up significantly in the next week. Unfortunately, that pattern does not follow through on the last two grants in 1999 and 2000. In both cases, the stock had been trending lower, they picked the exact date of the low, and the stock slowly began to improve from that point. It would have been virtually impossible to choose those exact dates, so backdating seems quite likely. In their 10-Q SEC report filed in May (which under the circumstances would have been blessed by their auditors), they say that “the Company has identified a significant deficiency in its controls relating to stock option plan administration and accounting.” The context that follows implies that the board had given some sort of blanket authority to management and that the authority had been misused by someone in “the Company’s human capital, finance and legal departments”, which, of course all report to Bill McGuire, the CEO and largest stock option beneficiary. The 10-Q goes on to say that the board has changed all of that and it won’t happen again, because future option grants “are to be made by the Compensation and Human Resources committee, and no authority to grant options is delegated to management.” In other words, the fox is no longer guarding the chicken coop.
As a former corporate treasurer, I’m in shock about what UNH apparently did, and why. My first reaction, when the probe was announced in late April, was that it would not be at all difficult for the management of UNH to grant options at or near the low trading points in their stock. Assuming that they did it the way we always did, options are very easy to grant with a telephonic meeting of the board compensation committee, to be ratified by mail etc. I saw it done frequently and it was entirely proper, albeit opportunistic. In UNH’s case, with board authority apparently already making it so easy to grant options, at or near a low point, why would someone in management engage in backdating to the exact date of a low? At the least, this is very greedy, and at the worst it’s outright fraudulent, not to mention stupid. In any event, if backdating is proven, Bill McGuire would likely have to take responsibility and he likely will not go unpunished. That could be messy, a la Ace Greenberg at AIG. Greedy CEOs have been kicked around a lot lately and it probably isn’t over yet.
Reading between the lines of UNH’s recent SEC filing, it seems that they have pretty much acknowledged irregularities, so it’s just a matter of time before the full story will be released in another SEC filing. The company’s board has hired the former enforcement chief of the SEC, who has a reputation as a very tough lawyer, to conduct an investigation into exactly what happened. This very constructive move was announced more than a month ago, so it’s likely that a report will be forthcoming shortly, and that’s when all the information should be available for decision making. If it’s not any worse than what the company has already reported to the SEC, we will keep the stock and consider adding to it at current levels, which represent a substantial discount from what our model tells us the ongoing franchise is worth in the longer term, with or without Bill McGuire. However, if the news is worse than what we currently know, we may have to quickly protect our capital.
Trading action in the stock during the last week or so seems to indicate that the street believes the worst news is already out. We will wait and see. Stay tuned.
Jack Falker
Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long UNH.
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