Cross Country Healthcare Stock Repurchase (NASDAQ:CCRN)
It’s been about 3 months since I locked in my 73% gain on Cross Country Healthcare, Inc. (NASDAQ: CCRN), and meanwhile the shares were down about 17.6% versus a loss of about 8.6% for the overall market. The sudden drop in prices put the company on my radar, again, so I thought I’d revisit it here. After all, what was a bad investment at $20.50 could be a decent investment at $16.90. I’ll take a look at the most recent financials and spend some time writing about the stock. Also, I wrote some updates on the company earlier, and I need to figure out what to do about this situation.
Those who know me best know that I love to brag. This might explain why people like to cross the street when they see me coming, or just try to avoid me altogether. While this tendency to brag has taken its toll on my social life, I have to be me. Anyway, I’ll bring you my personal obnoxious background for a review of my history with this stock. I bought it, then sold it for a 73% gain, then the stock dropped dramatically. I hope to maintain my record on this name by repurchasing today. I think the shares are relatively cheap despite the company posting amazing results in the last quarter of 2021 and the first quarter of 2022. Although I normally like to sell deep, I don’t think it’s worth worth it in this case, and so I’m just going to buy some stock. That said, I will let the puts I wrote earlier expire worthless or be offered to me before September.
I think the most recent financial performance has been quite impressive in some ways. Specifically, revenues and net income for the first quarter of 2022 were 139% and 218% (!) higher than the same period in 2021. This remarkable result follows the excellent results of 2021, which seem to have had enough stimulated the market. excited. I should also write that it’s not just about outperforming a slack year. Also compared to the first quarter of 2019, the results were good. I chose this year as another comparison year because, as you may recall, the world suffered a global pandemic in 2020. Compared to the first quarter of 2019, revenue increased by approximately 304% and net income went from a loss of $1.77 million. in 2019 for a profit of just under $62 million. The growth here is quite impressive in my opinion.
That said, I’m the kind of person who’s likely to tell you that these “glass half empty” guys are naïvely optimistic. I am, in short, a “depressing”. It is in this spirit that I would point out that the dilution I spoke about earlier is continuing rapidly. More importantly, long-term debt exploded in the first quarter of the year, from $180.5 million to just over $220 million. In my view, more debt increases risk, and the stock price should reflect that risk. Despite this, I must admit that they just sold the same amount in the first quarter of 2022 as they did in all of 2015. Thus, I would be happy to buy the shares of this company at the right price.
In case you are new to my articles, I will point out that I consider the underlying company to be separate from the stock that is supposed to represent the health of the company. If you’re not new, you know that I stress this point very, very, very often. All companies have a few things in common. They buy a number of inputs, including labor, they perform value-added activities to those, and then they sell the results, hopefully for a profit. In the final analysis, that’s what every business is. The stock, on the other hand, is a traded instrument that reflects the crowd’s overall belief about the long-term prospects of a given company. The crowd changes its mind very frequently, causing the stock price to go up and down. It is generally the case that the lower the price paid for a given stock, the higher the future returns for the investor. In order to buy at these cheap prices, you need to buy when the crowd is feeling particularly down on a given name. It’s easier said than done.
While you can understand this concept in theory, I see some value in introducing it to you, using Cross Country stock itself to demonstrate it. The company released its latest quarterly results on May 4. If you bought stocks that day, you’ve lost about 8.6% since then. If you waited just 8 days to buy, you’ve grown about 11% since then. Not enough has happened at the company in those 8 days to warrant nearly 20% variance in returns, highlighting the fact that the stock is a poor indicator of health of the underlying. The investor who bought stocks cheaper did much better than the investor who bought virtually identical stocks more expensive.
I measure the relative cheapness of a stock in several ways, ranging from the simplest to the most complex. From a simple perspective, I like to look at the relationship between price and some measure of economic value, like profit, sales, cash on hand, etc. Again, cheaper wins.
In my previous missive on this name, I complained that the price-to-book ratio and the price-to-sales ratio were 3.7 and 0.6 times respectively. Each of these values was near 5-year highs. Each of these valuation metrics is priced much more reasonably, based on the following criteria:
I like that the ratios are more in line with historical standards. It’s a necessary but not sufficient prerequisite to excite me right now.
In addition to simple ratios, I want to try to understand what the market is currently “assuming” about the future of this company. To do this, I turn to the work of Professor Stephen Penman and his book “Accounting for Value”. In this book, Penman tells investors how they can apply the magic of high school algebra to a standard financial formula to determine what the market “thinks” about a given company’s future growth. This involves isolating the variable “g” (growth) in a fairly standard financial formula. Applying this approach to Cross Country at this time suggests that the market is assuming that this company will grow around 0.7% over the long term. That’s a pretty pessimistic forecast, and for the reasons above, I’m going to take a small stance here.
In my previous missive on this name, I recommended selling the September put options with a strike price of $7.50 for $0.10. Despite the decline in the stock price, these puts are currently offered at $0, suggesting that the trade is working well so far. While I like to repeat success when I can, I can’t recommend selling put options at this time as the premiums on offer aren’t worth it. I think a better use of capital, in this case, would be to simply buy the stock right now. If the investor then needs income from the capital thus immobilized, he has the possibility of selling call options on his shares.
I like the performance I’ve seen here, despite the deteriorating capital structure. I think the shares are now at a much more reasonable price so I will buy back. Although I normally recommend selling put options, the newcomer bonuses aren’t worth it in my opinion, so I think it makes the most sense to simply buy stocks. I think “price” and “value” may remain unrelated for a while, but will eventually come together. I think investors would be wise to buy at current levels before prices rise to match value.