Imagine watching one of your holdings spike up 13% in one day, only to see your gains taken back (and then some) just four days later. That's essentially what happened to investors of managed health-care company Amerigroup (NYSE:AGP) last week. The roller-coaster ride began with the company's stock hitting a 52-week high following its third-quarter earnings release and then ended on Nov. 1 with a staggering loss in the courtroom, resulting in treble damages under federal law.
The company was basking in glory on Oct. 26, when it reported that its operations had swung the business to a $24.6 million third-quarter profit vs. a $2.3 million loss for the year-ago quarter. The surge in earnings resulted from an 11% increase in membership and $10.6 million in investment and other income. These earnings had a profound effect on the company's common stock the following day as it saw a new 52-week high -- 13% above the previous day's close. Trading volume was double its average, and Amerigroup boosted its full-year guidance.
Days later, shareholders who might have had their mailboxes smashed in by neighborhood hooligans on Halloween would concur that the occurrence paled in comparison to what happened to their long position in Amerigroup earlier that day. The company's stock plunged 15% after a federal jury in Illinois returned a $48 million verdict against the Medicaid managed-care company. Amerigroup said the verdict will automatically be tripled to $144 million under federal law.
The jury found that the insurer had discouraged pregnant women from enrolling in its health plans. The litigation, which was brought by a former Amerigroup employee, resulted in jurors deciding that Amerigroup had made more than 18,000 false claims against Medicaid. The Chicago Sun-Times reported that in 2001, the company's director of medical management sent out an email that contained the following "praise": "Please keep up the good work with the marketing reps of not trying to sign up pregnant women."
Although the quarterly earnings are certainly promising in terms of the direction in which the company's bottom line is headed, I don't think I would recommend this security as a flier to bargain hunters at the present time. The company has said that it had acted in accordance with the direction of the Illinois Department of Public Aid and that it plans to appeal the jury verdict. But I can't see this one playing out too well in the court of public opinion.
It might not play out too favorably in the wallet, either. Deutsche Bank noted that the $144 million judgment represents 94% of Amerigroup's total unregulated cash of $154 million as of the quarter ended Sept. 30. Deutsche Bank also noted that "the financial impact [if the award is upheld] could be material." Investors with a long position in this stock might at least consider reallocating funds from that long position toward the repair of their mailboxes.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
