We track 13F filings from hedge funds and other notable investors for a variety of purposes. For one, we have discovered that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (read more about small cap stock picks) and other strategies are likely possible as well. We also think that it’s useful to treat individual 13Fs as a list of recommendations from a top investor, providing a brief overview of some of their favorite stocks so that other market players can discover potentially interesting names. When we looked at the filing from Larry Robbins’s Glenview Capital we noticed a number of healthcare stocks among his top picks (see the full list of stocks Glenview reported owning). Here are the fund’s five largest healthcare holdings by market value as of the end of December:
Medical laboratory products and services company Life Technologies Corp. (NASDAQ:LIFE) was Glenview’s largest position at over 11 million shares. At a market capitalization of almost $11 billion, the stock trades at 26 times trailing earnings. Wall Street analysts expect high earnings growth, with the result being that the forward P/E is only 13. Indeed, net income was up 18% last quarter compared to the fourth quarter of 2011; however, revenue actually fell slightly and so we have doubts that Life Technologies Corp. (NASDAQ:LIFE) can continue this growth rate. As a result we can’t recommend the stock at this point.
Robbins and his team initiated a position of almost 14 million shares in $4.7 billion market cap hospital and outpatient health center provider Tenet Healthcare Corp (NYSE:THC). While many hospitals are trading at low earnings multiples, likely at least in part due to uncertainty concerning future regulations, even the forward P/E in Tenet’s case is 13. The stock has roughly doubled in the last year, thanks to a steady rise which began last August. We’d note that statistically Tenet Healthcare Corp (NYSE:THC) has high exposure to the broader economy with a beta of 2.3. We think there may be better values in the industry for investors to begin looking.
Health Management Associates Inc (NYSE:HMA), a hospital company with a geographic concentration in the South and Southeast, was another of Glenview’s top picks. Earnings at Health Management Associates were up sharply in percentage terms in the fourth quarter of 2012 versus a year earlier, though revenue growth was much more limited. This hospital stock has been another big gainer, rising 74% in the last year. The earnings multiples are a bit lower here than at Tenet and so even though they aren’t that low in absolute terms the company may have better value prospects.
The fund increased its stake in the largest publicly traded U.S. hospital stock, HCA Holdings Inc (NYSE:HCA), to 8.9 million shares. HCA made our list of the most popular healthcare stocks among hedge funds for the fourth quarter of 2012 (find more healthcare stocks hedge funds love) and it is arguably a candidate for pure value status: the trailing and forward P/Es are 11 and 10, respectively. However, HCA Holdings Inc (NYSE:HCA) experienced a steep decline in net income in its most recent quarter compared to the same period in the previous year. The stock is certainly cheap, but we’d want to investigate the causes of that drop.
Glenview just couldn’t get enough hospitals, with its position in Community Health Systems (NYSE:CYH) increasing from a relatively small one to 8.6 million shares. It is another stock which up strongly in the last year on much improved earnings- at least in percentage terms- but a considerably lower growth rate on the top line. We’d note that the company’s business also includes a number of home care agencies. Community Health Systems carries a trailing earnings multiple of 15, so only moderate growth is need to justify the valuation.
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Disclosure: I own no shares of any stocks mentioned in this article.