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Larry Robbins and his Glenview Capital hedge fund made a big bet on President Obama’s health care reform. As I noted last year, Robbins is one of the best-performing managers in the game.
Robbins was playing the Affordable Care Act by investing in publicly traded hospitals. A large portion of Glenview’s portfolio is still invested in hospital stocks and he’s been a top hedge fund manager the last couple years. This comes as the Obamacare benefit helped push hospital and other health care stocks to all-time highs.
However, the major hospital stocks have been sold off hard – as much as 40% year-to-date.
Still, there are other things at work here. One of the big tailwinds for hospitals is the aging population. And while the initial influx of new people with insurance was a big boost, there’s still plenty of runway for hospitals. Some 9 million people got insurance last year, but there are still over 33 million people without insurance in the U.S.
With all that in mind, here are the top three hospital stocks to buy on the recent weakness:
No. 1 Hospital Stock to Buy: HCA Holdings (NYSE: HCA)
Shares of HCA are down 23% over the last three months. HCA operates more than 160 hospitals in the U.S. and over 100 surgery centers. Its key market is the Sun Belt region, where there are faster-growing urban markets and an aging demographic.
One of the big reasons hospital stocks took it on the chin was dismal earnings from the nation’s leading hospital operator, HCA Holdings. The company noted that its uninsured volume is growing, up to 8% of total admissions in the third quarter versus 7.3% a year ago.
The key with HCA is that it’s generating industry-tops return on invested capital, coming in at close to 20%. It’s also supposed to grow earnings at one of the highest rates in the industry over the next five years.
Of note, billionaire David Tepper’s Appaloosa Management have been buying up shares. Tepper noted that he thought the stock was hit too hard and was buying more.
No. 2 Hospital Stock to Buy: Community Health Systems (NYSE: CYH)
Community Health was one of Glenview’s top 10 holdings as of this summer. But its shares have fallen over 40% this year. The stock now trades at just 8 times next year’s earnings and just 6 times free cash flow.
This hospital operator recently offered guidance that showed costs increasing faster than expected. However, there were bright spots, which included a 0.2% rise in total admissions year-over-year and 0.1% increase in same-store admissions.
Community Health runs hospitals in various rural and non-urban communities. In truth, it’s the largest operator of non-urban hospitals in the U.S. The enticing thing about non-urban areas is that they offer higher reimbursement rates.
Just a few months ago it spun off close to 40 smaller, slower-growth hospitals in rural areas as Quorum Health.
No. 3 Hospital Stock to Buy: Tenet Healthcare (NYSE: THC)
As of the summer, Tenet Healthcare was a top five holding for Glenview Capital. Tenet Healthcare shares are off 33% in just three months.
Tenet runs close to 80 hospitals in the Sun Belt states. Its hospitals are in fast-growing urban areas, including a larger number in Florida, where there’s a high concentration of aging individuals.
In the end, the major hospitals had a setback from weak earnings. However, the beauty of hospitals is that they should still perform well regardless of the economic backdrop, given that health care spending is more non-discretionary.
Then there’s the aging baby boomer generation that will also lead to patient growth. The three hospitals above have been hit the hardest but appear to be the best big buys in hospitals.
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