Category Archives: Cardinal Health

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.

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

It is now time to recommend that Cardinal Health (CAH) be sold at the market. The stock has performed reasonably since the research recommendation was issued on June 4, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock took a small dip in the early part of July, but changed direction after July 10th and hasn't looked back. From the current level, CAH is poised to reach the $43 level considering that we just got a Dow Theory cyclical bull market signal (within a larger secular bear market.) In the pursuit of "seeking fair profits" the returns that this stock has provided within the last fifty-four (54) days say that it is worthwhile considering alternative opportunities.

CAH was recommended when it was trading at $29.95. As of July 28, 2009, CAH was quoted at $33.03. This equals a return of 10.28% in less than 2 months. Conservatively, on an annualized basis this would equal approximately 61% return. Selling this stock now also generates a return 228% greater than the amount of the dividend yield if the stock was held for a whole year.

It is always recommended that when selling a stock, one should not place an order after hours or when the market is closed. 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, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.

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