Bireme Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. In the letter, the hedge fund said that its flagship U.S. equity strategy, Fundamental Value, returned -26.4% on a net basis. The fund underperformed its benchmark, the S&P 500 Index which returned -19.4% in the same quarter. You should check out Bireme Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.
In the said letter, Bireme Capital highlighted a few stocks and HCA Healthcare Inc. (NYSE:HCA) is one of them. HCA Healthcare is a health care services company. Year-to-date, HCA Healthcare Inc. (NYSE:HCA) stock lost 27.8% and on May 22nd it had a closing price of $106.69. Here is what Bireme Capital said:
“Hospitals have been battling on two fronts during the current outbreak: the physical and the financial. On the physical front, hospitals in COVID-19 hotspots have been scrambling to expand ICU wards and working staff overtime to care for the influx of patients. Meanwhile, revenue has fallen off a cliff, even for hospitals in relatively unaffected areas.
The problem is that everything besides COVID-19 treatments and absolute emergencies are on hold. This includes elective surgeries, checkups, physical therapy appointments, and most other revenue-generating care that hospitals provide. Even baby deliveries have been affected, with newborns and parents staying for one night instead of two or three. JP Morgan estimated that hospital revenue fell 50% in recent weeks.
The $2 trillion emergency spending bill signed by Trump into law March 27th includes some relief for hospitals. Here are a few of the provisions that will impact HCA:
- $100b for healthcare providers who have lost revenue due to COVID-19
- 20% bump to Medicare rates related to COVID-19 treatment
- Postpones 2% cut to Medicare payment rates until 12/31/20
- Prepayment of funds for future Medicare treatments
These benefits are sorely needed to shore up the finances of the many lower-margin hospitals around the US. And like the SBA loans enabled by the CARES Act, the funds earmarked for healthcare facilities may be used up fairly quickly: based on $1.2 trillion in annual hospital revenue, a 50% drop in revenue implies a mere two month runway for the $100b.
We are confident that HCA — as one of the largest and most politically savvy healthcare providers in the country — will get its share of this money.
Cost cuts are another way that hospitals are managing the crisis. Leaders at hospitals such as St. Claire in Kentucky and Lifespan in Rhode Island are making dramatic cost cuts during these unprecedented times, including furloughing large swaths of staff. Hospital groups are even delaying bonuses owed to physicians in a bid to conserve cash. HCA itself has described a multi-tiered cost cutting plan that will be implemented if revenue shortfalls continue. We believe these measures, while brutal for affected staff members, will allow conservatively-financed hospitals to emerge from this crisis relatively intact.
We estimate HCA could burn $4b in cash in the next two quarters, assuming COVID-19 impacts extend into Q3 and they are able to reduce employee costs by 25%. At YE 2019, the firm had $3.2b available on its senior secured credit facility and $600m in cash. This money alone would nearly cover the shortfall of the next two quarters, and the company has already received $4b in advanced payments from Medicare. As a final backstop, HCA could likely borrow an additional $15b if they (and their lenders) were willing to increase leverage to 5x pre-COVID EBITDA, an amount they have managed successfully in the past.
At some point, immediate coronavirus concerns will ease, and hospitals will return to a more normal operating environment. Yet the economy will still be left to recover from the extensive damage inflicted. Some have posited a V-shaped economic recovery, while others think there will be a much more protracted and painful recession. There is a concern in the market that HCA’s reimbursement rates will continue to be depressed in a prolonged recession scenario given the concomitant increase in Medicare and Medicaid patients (Medicare and Medicaid pay lower prices than private insurers). However, HCA generated an EBITDA margin of 19% in 2009, in line with 2019 levels. Thus, we feel comfortable with the stability of HCA’s margins even in a deep recession. This is a business that has performed well through a wide variety of economic environments, including the Great Recession, and typically had more debt than it has today. Furthermore, we view long-term depressed reimbursement rates unlikely, as any reduction in average hospital reimbursement rates would bankrupt low-margin rural hospitals, a politically unpalatable result — and the exact reason why the CARES Act postponed Medicare reimbursement cuts.
We were shocked to see HCA initially trade down more than 50% in mid-March, in line with hotel companies and online travel agents. HCA will likely earn $11-12 in EPS when the COVID-19 crisis recedes, and we think the stock will trade back towards $150. Therefore, during Q1 we added we added ~80% to our shareholdings at an average price of roughly $90.”
In Q4 2019, the number of bullish hedge fund positions on HCA Healthcare Inc. (NYSE:HCA) stock increased by about 5% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with HCA’s growth potential. Our calculations showed that HCA Healthcare Inc. (NYSE:HCA) is ranked #30 among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:
Disclosure: None. This article is originally published at Insider Monkey.