April 2010 Update

Earlier this month, we removed our discretionary clients immediately (and are in the process of removing the remaining few) from this investment. The average client made a good return, but for the following reasons we have stopped following this company:

1) Quarterly execution below plan, combined with additional cost that are planned to increase marketing campaign.

2) Both political and state financial pressures to reduce state medicaid payments while increase insurance benefits to the recipient.  Thus, more and future profit margin risk!

3) Forecasted higher cost and increased regulation from new approved Health Care Bill.

We are pleased still to see good returns from the stocks that fit our model (Durig’s Stock Reviews).

Sincerely,

Randy Durig

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WellCare Health Plans: WCG 60.55 [-0.70]

High Cash reviewed companies

September 21, 2009

RE: High Cash Stock Review on WellCare Health Plans, Inc. (WCG $26.58) – A Medicare, Medicaid & Insurance Company

Dear Valued Customer,

We like this one, and it fits our model! Here is our review process, including support for why this is currently one of our top picks.

Step 1 – We like companies with pristine balance sheets.

WellCare has roughly 1 billion dollars in cash and no long term debt. It doesn’t get much better then that.

Step 2 – We like extremely low enterprise values.

When you subtract out the cash and debt out of the enterprise, WellCare’s value of the operation company is almost nothing. So if you buy the company for say about 27 dollars per share, or roughly 1 billion dollars, could the new owners pay themselves a profit of about 1 billion dollars or the amount they put into the company? The answer is YES, but with a small caveat: they must make sure all the short term debt obligations are satisfied.

The company’s main business (with billions in sale and is profitable) has almost no value.

Step 3 – Is the operation or enterprise driving value to the shareholders?

WellCare receives another yes. They had an outstanding quarter, as they made 88 cents per share in profit (roughly double what most annalists expected). The current PE ratio, using the average forecast expectation, is around 8, with the last quarter being far above the annalist’s expectations. Not only is the PE low, but there is room for many more increases in profit.

Step 4 – Is this a good business?

We believe this is a very good business with a model that is right for the baby boomers who are soon to retire and the political system where it may be. It’s a tough business to replicate and, due to economies of scale, I have seen little to no new players entering this market.

Step 5 – Is the Train Wreck, and then the fog, from the Wreck clearing?

When finding companies around cash value, often there is what we call a Train Wreck. The FBI raid on WellCare headquarters created the Train Wreck, and the company has done most of the tough, dirty work since then. This often takes around 1 1/2 to 3 years – we call this time period the fog. During periods of fog, often many of the improvements to drive the value of the company higher is in place, but due to the many changes, it’s hard to find real tangible evidence, while the preceding value collapse is still heavily imprinted in peoples emotions.

WellCare seems to be no exception. They have redone their accounting, changed top management, dealt with class action law suites, restructured their business, lowered their cost, grown revenues – the many little things to get the profit locomotive back on the profit track.

Now with most of these problems behind them, the company and it’s prospects are truly looking very good, but they still have almost no enterprise value! You must trust me here – an enterprise that has just earned .88 cents profit last quarter and over a billion dollars in sales has value. The average earning estimate is for WellCare is $2.92, the average PE for an insurance company is around 15 times expected profits, the last quarter alone demonstrated to me that WellCare enterprise could be valued at 13 dollars. Then, using a run rate (taking last quarter and multiplying by 4 will give an enterprise value of $52. also 15 times the current years 2.92 estimate is $43.8 dollars.

If you add using the more conservative 15 times the annual earnings estimate 3.92 you get a value of $43.8 per share, plus the cash of $24 per share , we get a $76.8 value for the stock.

Yes, WellCare’s image must change to achieve anywhere close to this value. It still has plenty of work to do, but it appears to be coming down the track of creating wealth for our clients right on schedule with the positional fair value estimate about 250% above current prices.

Wellcare News

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Disclosure

Yes, absolutely yes, we started buying at 24 dollars and above per share for selective clients. Both for myself and related accounts own this company. I just wish I could raise 1 billion dollars and buy the whole company. I would like to buy the whole $7 billion in sales, a profitable enterprise business, for nothing. I’m sure other successful business persons would also like to do the same.

P.S. Knowing that we had a great economic train wreck one year ago, I can’t wait and am already sorting through the new wreckage. If you would like other ideas like WellCare, please give us your email and phone number. Making money after a demise can be fun and rewarding, and if done right you can help reduce the many risks that is involved with every equity investment. If you want to be involved with a take over of an enterprise with almost no value please call me directly.

Please don’t hesitate to call with any questions.

Sincerely,

Randy Durig
Financial Investment Adviser
Dir 971-732-5119

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