Barron’s recently published a story saying American Physicians (ACAP), a medical-malpractice company, was undervalued. Perhaps on 2007 numbers - but on the trailing 3 quarters, it doesn't look so cheap.

Looking at 2007, the company’s free cash flow was $40.9 million. Dividing this number by its market cap of $420 million gives a free-cash-flow yield of 9.7%. Not bad.

However, the last 3 quarters for 2008 aren't so exciting. It looks like 2008 free cash flow might be somewhere in the neighborhood of about $30 million. That would give a free-cash-flow number of about 7.5% or so.

The company has about 45% of this in municipal bonds. These bonds have been safe in the past, but may prove to be a problem in the future. The subprime problem is widely expected going to spill over into municipalities and other government entities. It's hard to manage a portfolio that size and not be affected. And even if the company isn't affected, it could still get sold off with all other insurers.

Another problem: People assume the medical business can weather an economic downturn. I’m not so sure. If unemployment is going up, how are those people going to pay for doctor visits? If everyone is making less money, that means there will be less money to pay doctor bills. Even if this problem only manifests itself into a few percentage points less in sales, it will cause a ripple affect.

It might be too early to say about American Physicians. I'd consider holding off. It will probably get cheaper in an economy where there's no such thing as a defensive stock.