How to invest for Obamacare was one of the topics this year at CNBC’s Delivering Alpha conference. A number of top hedge fund managers chimed in to provide investors with their alpha-driven stock picks. Most notably, Larry Robbins, founder of Glenview Capital, touted his best ways to play the industry. He’s making big bets on hospitals.
Robbins notes that these companies operate in a very stable and defensive growth industry. He also believes that for-profit companies will be a major force in keeping healthcare costs lower than the most dire predictions.
Tenet Healthcare Corp (NYSE:THC) and Health Management Associates Inc (NYSE:HMA) are two of Glenview’s top hospital stocks per the fund’s 13F filing with the SEC. The two hospital operators, Tenet Healthcare Corp (NYSE:THC) and Health Management, make up the fund’s second- and third-largest holdings, respectively.
Tenet Healthcare Corp (NYSE:THC)’s revenue is expected to be up 6.8% in 2013, and 6% in 2014. Other big news includes the fact that Tenet is looking to expand its network with the Vanguard Health Systems, Inc. (NYSE:VHS) acquisition. The Vanguard Health Systems, Inc. (NYSE:VHS) acquisition will boost the company’s position in South Texas, increasing Tenet Healthcare Corp (NYSE:THC)’s hospital facilities by 60% and outpatient facilities by 25%.
As mentioned before, hospitals will be a big winner of the healthcare reform act, but Tenet should be one of the biggest winners. Tenet Healthcare Corp (NYSE:THC) has the majority of its hospitals in the Texas, Florida and California areas, which also happen to have the highest percentages of un-and under-insured patients.
Robbins’ other favorite hospital operator, Health Management Associates Inc (NYSE:HMA), continues to expand its service lines by adding specialists in areas such as neurology and cardiology. Health Management Associates Inc (NYSE:HMA) appears to be a solid buyout candidate. Glenview owns around 15% of the company and has been pushing it to remove its poison pill (15% threshold) for just this reason.
One of Health Management Associates Inc (NYSE:HMA)‘s biggest opportunities lies in outpatient care. The company generates around 50% of revenue from outpatient services. A healthcare survey shows that in April, only one-third of hospitals thought inpatient admissions would rise in 2013, compared to two-thirds projecting a rise in outpatient admissions.
Worth noting is that both hospital operators, Tenet Healthcare Corp (NYSE:THC) and Health Management Associates Inc (NYSE:HMA), trade with rather high betas (high volatility) at 2.2 and 2.6, respectively. Tenet also trades at over 60 times earnings, while Healthcare Management is at 25 times.
Medical devices
Robbins also likes Thermo Fisher Scientific Inc. (NYSE:TMO). While the life sciences tools industry is highly fragmented, Thermo Fisher Scientific Inc. (NYSE:TMO) is looking to make the industry a little smaller. Back in April, Thermo Fisher Scientific Inc. (NYSE:TMO) announced plans to acquire Life Technologies Corp. (NASDAQ:LIFE) for $13.6 billion. Life Technologies Corp. (NASDAQ:LIFE) also happens to be Glenview’s top stock holding as of the end of 1Q. The acquisition makes sense given the complementary products the two offer.
Robbins notes that growth slowed in the space of late due to sequestration cuts, but the hedge fund manager believes that organic growth will recover in 2014. The Thermo-Life combo would generate sales in excess of $16 billion, with a 25%-to-75% split for instrument sales versus recurring revenue.
Thermo Fisher Scientific Inc. (NYSE:TMO) believes that the deal could be accretive to EPS by upwards of $1.00 in year one. Beyond the Life Technologies Corp. (NASDAQ:LIFE) acquisition, Thermo Fisher Scientific Inc. (NYSE:TMO) is turning to emerging markets for growth. The company hopes that over 25% of revenue will come from Asia and emerging markets by 2016, compared to 10% in 2006.
Bottom line
Glenview Capital likes hospitals, as do I. The big tailwind for the hospitals includes greater inpatient occupancy levels, which should be pushed higher as more individuals are covered with insurance due to the healthcare reform.
Tenet and Health Management Associates Inc (NYSE:HMA) are two of the industry’s top picks, with Tenet as an industry consolidator, while
Health Management could be an acquisition target. Thermo Fisher Scientific Inc. (NYSE:TMO) has a leading position in the medical-device segment and its Life Technologies Corp. (NASDAQ:LIFE) acquisition will help boost the companies offerings and markets covered.
Tenet and Health Management Associates Inc (NYSE:HMA) are two of the industry’s top picks, with Tenet as an industry consolidator, while
Health Management could be an acquisition target. Thermo Fisher Scientific Inc. (NYSE:TMO) has a leading position in the medical-device segment and its Life Technologies Corp. (NASDAQ:LIFE) acquisition will help boost the companies offerings and markets covered.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Thermo Fisher Scientific (NYSE:TMO). Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Finding Alpha Amongst Obamacare originally appeared on Fool.com is written by Marshall Hargrave.
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