Four months ago, Motley Fool co-founder and Motley Fool Stock Advisor co-author Tom Gardner penned some prophetic words about his two-time recommendation, managed health care provider First Health Group
First Health Group has been nothing short of disastrous. Management has consistently overpromised and underdelivered, while spending substantial amounts of capital to buy back stock rather than shore up its business model. I'm not recommending that you sell because I hope FHCC will bring in new management, perhaps in the form of an acquisition.
That was prophetic in two senses. First, in the biblical sense of calling for fire to rain down from Heaven and consume this blighted company and its wealth-destroying ways. Second, in the usual sense: Yesterday, First Health announced that it is in fact getting bought out by Coventry Health Care
At the time Tom penned those words, First Health was selling for roughly $15. On Wednesday, it closed at $15.04 a share. Forgive the pun, but this little PPO has been flatlining for months now. It was about time someone came along and put it out of its (and its shareholders') misery. On Thursday that happened, and First Health's shares jumped $2.00 in response, closing at $17.04.
Of course, no good deed goes unpunished. No sooner had the buyout news gone out than 11% of Coventry's market capitalization vanished, and McGraw-Hill's
So what's a First Health shareholder to do? One option is to wait around and see whether Coventry can make some money off of this business. Despite having a profit margin just a fraction of First Health's, Coventry sports an almost identical return on equity, so the company is good at doing more with less. On the other hand, First Health shares are now being quoted at close to Tom's June estimate of their intrinsic value. (Click here for a risk-free subscription to Stock Advisor, and we'll give you the magic number.) Sometimes, getting while the getting's good is the prudent choice.
Fool contributor Rich Smith does not own shares in any of the companies mentioned here.