Tags: random thought, stocks, CYH

CYH — from a technical analysis perspective, a similar situation to that described on MU

1-yr chart of CYH, courtesy of freestockcharts.com1-yr chart of CYH, courtesy of freestockcharts.com

To say it up front, I am long Community Health Systems (CYH). But I think it’s hard not to like this pattern. This is a stock at an extraordinarily low valuation level (see below chart, from Morningstar) that has spent a few months carving out a bottom, and is now starting to break through overhead resistance level, in this case the 50 day SMA. I would not be surprised, if investors will give CYH a free pass until it challenges the recent highs around $17. At that point it will likely require some fundamental signs of strength to make further gains.

CYH valuation as of June 8, 2016, from morningstar.comCYH valuation as of June 8, 2016, from morningstar.com

My current plan is to stay long with a price target of $17. Once we get there, I will evaluate whether it makes sense for me to continue to hold and, if it does, whether to start writing covered calls against the position.

Note: Before I get accused of being too naïve about the risks of buying this stock: Community Health Systems has been on an acquisition spree over the past 10 years, which has resulted in a growing pile of debt. At present, the tangible book value of CYH (book value after subtracting the goodwill created by acquiring assets above their book value) is negative. While the company is profitable, it has very little cushion to protect against any potential downtrend in revenue, or against escalating expenses. The Altman Z-Score for CYH is around 1.0 (“Distress Zone”), and Moody’s Investor Service assigns Community Health Systems’ debt a B2 rating, which is far below investment grade. Both of those metrics indicate a non-trivial risk of bankruptcy for CYH. So, buyer beware…

June 8, 2016 at 5:02pm

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