Heartland Advisors on Encompass Health (EHC): “We Believe our Patience will be Rewarded”

Heartland Advisors, an investment management firm, published its “Heartland Mid Cap Value Fund” fourth-quarter 2021 investor letter – a copy of which can be seen here. Security selection was mixed with holdings in Materials and Consumer Discretionary bolstering returns; however, the portfolio couldn’t overcome weakness in Financials and Information Technology, and the Strategy lagged the Russell Mid Cap® Value Index for the quarter.  The portfolio finished the year up more than 20% and kept pace with its benchmark. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

Heartland Mid Cap Value Fund, in its Q4 2021 investor letter, mentioned Encompass Health Corporation (NYSE: EHC) and discussed its stance on the firm. Encompass Health Corporation is a Birmingham, Alabama-based healthcare company with a $6.1 billion market capitalization. EHC delivered a -4.90% return since the beginning of the year, while its 12-month returns are down by -22.81. The stock closed at $62.06 per share on January 27, 2022.

Here is what Heartland Mid Cap Value Fund has to say about Encompass Health Corporation in its Q4 2021 investor letter:

COVID complications. Shares of many Health Care companies lagged as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Strategy’s holdings in the sector trailed the benchmark average, and the group contained a key detractor, Encompass Health Corporation (EHC).

Encompass provides inpatient rehabilitation services as well as home-based health and hospice care. Both businesses enjoy a competitive advantage over many of their peers and, we believe, are well positioned to grow organically, and acquire smaller competitors that could further economies of scale.

A labor shortage has taken a toll on sales and profit margins at Encompass as the company struggles to fill positions in a challenging environment for nursing wages and availability. Revenues have also been hurt by a slowdown in elective surgeries performed, which results in a smaller pool of patients in need of rehabilitation services.

When we took a stake in Encompass late in the summer of 2020, we recognized that COVID-related headwinds could endure longer than anticipated. However, the team believes the current challenges will eventually fade as enhanced nurse recruiting outreach helps mitigate staffing pressures while COVID-19 containment and treatment efforts gain traction. With shares producing an 8% free cash flow yield and trading at just 9x 2022 enterprise value/earnings before interest, taxes, depreciation, and amortization, we believe our patience will be rewarded.”


Our calculations show that Encompass Health Corporation (NYSE: EHC) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. EHC was in 44 hedge fund portfolios at the end of the third quarter of 2021, compared to 42 funds in the previous quarter. Encompass Health Corporation (NYSE: EHC) delivered a -2.36% return in the past 3 months.

In October 2021, we also shared another hedge fund’s views on EHC in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.

Disclosure: None. This article is originally published at Insider Monkey.