There were no thematic winners or losers last year. Our best performing stock was a technology company, but our worst performer was a tech nology stock as well. Our second best performer was an energy company, but our second worst performer was also an energy company. Our retailers performed well, as did our education and industrial companies.Â
Importantly, we like the industry in which Centene (CNC) competes. Some of our investors might recall that one of our prior investments, Amerigroup, was acquired in 2012 by Wellpoint at a val uation that allowed us to achieve a return on investment of greater than 100% over the roughly one - year time period that we owned the shares. Medicaid managed care companies not only save states money but also offer better service; therefore, more states a re letting managed care companies run their Medicaid programs. To that end, states are expanding both the geographies carved out to managed care companies and the types of programs. The next phase of growth will come from the dual - eligible population. D uals (or dual - eligible population) are 8.3mm 3 people in the U.S. that are eligible to receive both Medicare and Medicaid benefits (mainly low - income seniors). According to the Kaiser Foundation, Duals accounted for almost 40% of Medicaid spending although they made up only 15% of the Medicaid population. We believe there are ample growth opportunities for CNC and other companies to meet the challenges of managing these disparate Medicaid members for the foreseeable future.
As we alluded to above, CNC inc urred some unusual expenses in 2012 due to a bad contract in the state of Kentucky. Thus, in 2012, CNC barely earned any money for the year, but we believed that was a temporary situation. Sure enough, CNC exited the Kentucky market and should earn close t o $3.00 per share in 2013 once it reports its fourth quarter's earnings in early February. Our base case estimate has CNC earning $4.30 over the next couple years, and significantly more over the longer term, so it appears that management and the company a re well on their way to achieving that metric.
Unfortunately, we only have a small position in CNC as the stock took off as we were trying to accumulate our position. Nonetheless, should CNC have a hiccup and the stock decline to a more attractive valuat ion, we have the financial wherewithal to substantially add to our position.
From FPA Capital’s fourth quarter 2013 commentary.
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