Two recent emails from Minyans bring up the question of how and/or when one might want to think about trying to catch the proverbial “falling knife”. Here are the emails and a few thoughts to ponder.

• Fil, can you offer comments/insights regarding Wellcare Health (WCG). What do you do with a stock that plunged about 80% based on a 200-agent FBI raid on the HQ, with allegations of fraud and several states threatening legal recourse, and yet the company reports blowout earnings this morning and the stock pops 50% pre-open?! Does the earnings report mean anything given the many question marks surrounding the company? If the market is infinitely wise then why the massive stock price plunge all the while with indications that the company would announce a very good Qquarter( i.e. the better-than-expected earnings is not truly a surprise, the question is how much of it is real), and now the huge pop?
  
  
• Fil, love your comments on BankUnited (BKUNA); I think they're right on! Is there a point that you think BKUNA is a buy, or is there a probability/possibility it could go bust? I've been watching it closely since it dropped below $15.00 and am sorely tempted with its $7-8 range. I'm typically a bottom feeder of Miami-area stocks, and have only been burned terribly bad once -- Southeast Bank -- but that was more because of the FDIC's interference, or so that's what it turned out to be. Keep up the good work! – Minyan NL

In many vibes I have written for the ‘Ville I have referred to myself as “Stumpy” in honor of my propensity to attempt to catch falling knives. If I am entirely comfortable with what I know (and don’t know) about a specific company, and the stock price seems to be getting excessively hammered, I have been known to step in front of the train and to buy using a “large scale-in” approach. But not all falling knives are created equal, and my sense is that Wellcare Health (WCG) and BankUnited Financial (BKUNA) are two names that show characteristics of what I would avoid at any price.

The reason I have avoided WCG is straight forward: it is nearly impossible to formulate a reasonable scenario of what is going on in that place and how it will affect the business, but we can categorically say that 200 FBI agents sniffing in every corner of your offices is not conducive to healthy day-to-day business activities. So not only I am not comfortable with what I don’t know, what I actually do know makes me run the other way. I confess that last week I did entertain setting up an option position in WCG but strictly as a function of the sky high volatilities in the options, not as a directional play. Ultimately, after kicking around the possibilities with some wise people, not even the option idea proved particularly appealing. Bottom line, with tens of thousands of public companies which do not have FBI agents crawling up their tails, it is hard to fathom why I would want to get involved with the one or two that do.

BKUNA is a different case. You can search the archives for my many posts on this name and all the reasons why I believe this bank is in deep deep trouble, but the crux of it is that its business model resides at ground zero of where the housing debt bubble meets the imploding housing market. It may very well be that BKUNA survives without a massively dilutive recapitalization, survives but only after a massively dilutive recapitalization, or gets unceremoniously buried. But even in the rosiest of scenarios what would be my upside here? Why would I want to go long this bank when there are dozens different ones which do the exact same thing without getting themselves in trouble?

Finally, here are some of the questions Stumpy asks himself to try to distinguish between “falling knives” and guillotines:

• Is the company one of the top two or three players in an un-crowded competitive space?
• Is the company getting crushed because of a combo of lofty expectations and high valuation?
• Is the broader secular story intact?
• Are there plausible excuses/explanations for what disappointed the Street?
• What is likely to happen when the company disappoints again?
• What’s my downside if my rosy analysis is wrong? Is there net cash on the balance sheet to backstop more operating disappointments?
• Do I want to get involved for a trade or for a longer term hold? (This impacts the size, scale-in range, and risk I am pain I am willing to take)
• Can I afford being very wrong?
• Is it worth it?