Death and Taxes
Profiting from two certainties
… in this world nothing can be said to be certain, except death and taxes.
- Ben Franklin
Taxes
Let’s start with taxes as death is a better topic to end on. Max out all tax-advantaged accounts. Not doing so is stealing from yourself. The best way to max out your IRA was to take advantage of the Robinhood (HOOD) 3% IRA match. While that was recently discontinued, it could come back soon. Robinhood’s over the top sign up bonuses have helped drive assets and its share price.
Meanwhile, you can still get 1% on transfers.
Robinhood Gold is well known for its 3% cash back card and 5% APY on uninvested cash. But among my favorite benefits is its free margin on the first $1k. Transfer $2.5 million to Robinhood and get $25k in bonus cash. I bought 3,152 shares of Enhabit (EHAB), spending $25k of cash as well as $999.94 of margin, which is on the house.
Death
Enhabit is a hospice and home healthcare business. So far it has been a total disaster. How can you lose in as recession-proof business as death? Welp, they have.
This is a promising business but it has been mismanaged at every step since its spin-off. It trades under $10 per share due to the inept and profligate mismanagement. But it is about to hit an inflection. This failure deserves a board and management refresh, which I anticipate in the next few months. That refresh coincides with the two year anniversary of the spin-off, which is also the IRS safe harbor for selling the company. They mishandled a botches strategic review recently which was the last straw for shareholders. They rejected private equity interest. They failed to schedule follow-up meetings with potential bidders. They started with intentionally or unintentionally unrealistic asks. They offered disorganized financials. These embarrassing failures offer an opportunity. Shareholders can reassert control, get the company in order, cut waste, then remarket it. It is worth at least $12 as a properly managed stand alone business. It is worth within $3 of $17 in a deal. The higher end would be if we get multiple strategic bids; that could take somewhat more time. The lower end would be from a financial buyer but we could get that imminently. Either in the public or private market, this can get cleaned up and shipped. The ultimate owner should be UnitedHealth (UNH) or Humana (HUM). Both have been distracted but could buy Enhabit when they come up for air. A possible administration change could clear regulatory complexity as soon as next year.
Caveat
If shareholders fail to replace the board and management in the third quarter, the current leadership could continue to waste money, mismanage the business, and drive the share price down another 62%. Warren Buffett once said that,
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
This is the opposite — a management with a bad reputation has tackled a business with brilliant economics, leaving management’s bad reputation intact. They had their chance and they blew it. Given another chance, they will probably blow it again. No matter how much shareholder wealth they incinerate, there remains a 100% downside from here.
Conclusion
Robinhood offers free capital from their transfer bonus plus free leverage from their margin pricing. Take it.
Enhabit offers a reasonably likely downside around today’s price, a base case around $12 and upside around $17.
TL; DR
Expect to hear more from me on Enhabit. They are in the death business but their shares need not trade like death. Management might hope that shareholders accept mediocrity. We won’t.
My thoughts on accepting death and shares that trade like it…
Do not go gentle into that good night
Dylan Thomas
Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night.
Good men, the last wave by, crying how bright
Their frail deeds might have danced in a green bay,
Rage, rage against the dying of the light.
Wild men who caught and sang the sun in flight,
And learn, too late, they grieved it on its way,
Do not go gentle into that good night.
Grave men, near death, who see with blinding sight
Blind eyes could blaze like meteors and be gay,
Rage, rage against the dying of the light.
And you, my father, there on the sad height,
Curse, bless, me now with your fierce tears, I pray.
Do not go gentle into that good night.
Rage, rage against the dying of the light.
