August 5, 2011
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: If you thought the worst was over after Gentiva Health Services (Nasdaq: GTIV ) shed 34% of its market cap yesterday, that would be understandable. Understandable, but wrong. Gentiva is down 13% more today.
So what: I probably don't have to tell you this by now, but earnings are to blame. Gentiva announced yesterday that thanks largely to reduced health care spending in Washington, this hospice care provider will only earn $2.10 or so per share this year.
Now what: "But wait," you say, "doesn't that mean the stock only costs 3.6 times earnings?" Well, yes, it does. Gentiva also generates a lot of cash -- $95 million over the past 12 months. On the other hand, the company also has a lot of debt. Its balance sheet is laden with close to $1 billion of the stuff.
So I ask you: Would you be comfortable if your credit cards were maxed out to a sum roughly 10 times your annual income? If not, then you probably shouldn't be comfortable owning Gentiva, either.
Can Gentiva pay off its debt and emerge debt-free and cash rich? Add the stock to your Fool Watchlist and find out.