Sell Cardinal Health (CAH) at the Market

Since our write-up on Cardinal Health (CAH) on September 29, 2009 the stock has appreciated 23%. Purchasing the stock on 9/30/09 for $26.80 and selling it on 2/23/10 for $33 would yield an annualized return of 57%. This exclude two dividend payments.

Let's review the numbers. The table below shows the previous article's fundamentals compared to today's figures.

Date P/B F P/E P/CF Yield
9/29/2009 1.11 12.00 6.00 2.60%
2/23/2010 2.33 13.81 8.70 2.10%

As you can see, the valuation improved quite a bit given that nothing substantially materialized other than the company raising the profit outlook. Looking at the figures above, you can see that the price-to-book (P/B) ratio has more than doubled. This occurred because of the 2nd quarter results. Because of the recent changes, CAH is no longer the bargain we saw back in September 2009 when it was trading as if they didn't have any intangible assets. Remember, I stated that "given that all CAH competitors (ABC, MCK, and OMI) are trading at more than 2.3x book value, CAH is deeply discounted at 1.1." Now that CAH appears to be fully valued, I have to urge investors to search for safer alternatives.
A 23% profit may not seem like much, however it is a big accomplishment given the stock was held for nearly 5 months. Remember, we are only interested in "seeking fair profits". We at New Low Observer, feel that the risk/reward is no longer in our favor and we would rather take 23% in 147 days.
Investment Observations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research, you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, we prefer holding only 2-3 stocks at a time.

Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the Investment Observation was made (please avoid making this mistake.) We aim for mediocrity in our returns, therefore we are happy with 9-12% annual gains. However, since codifying this approach to investing in 2005, we have had annual returns of 20% and above every year since.

It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, we would rather leave some money on the table rather than have it taken away from us by the trades that are placed by institutions and market makers.

- Art

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