3 Stocks Primed to Move Higher

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A rough week for stocks is the not the most comforting environment for those looking for trading opportunities.  But some stocks did manage to trade higher on respectable volume.  This week’s winners are Centene (NYSE: CNC), Extra Space Storage (NYSE: EXR), and Tenet Healthcare (NYSE: THC).  What has peaked buyer interest?

<table> <tbody> <tr> <td> <p><strong>SCORECARD</strong></p> </td> <td> <p><strong>Centene</strong></p> </td> <td> <p><strong>Extra Space Storage</strong></p> </td> <td> <p><strong>Tenet Healthcare</strong></p> </td> </tr> <tr> <td> <p>Volume Buying  (multiple of average trading volume)</p> </td> <td> <p>X5</p> </td> <td> <p>X6</p> </td> <td> <p>X4</p> </td> </tr> <tr> <td> <p>New [<em>x</em>] Monthly High  (where [<em>x</em>] has a value of)</p> </td> <td> <p>7</p> </td> <td> <p>100</p> </td> <td> <p>19</p> </td> </tr> <tr> <td> <p>Sector</p> </td> <td> <p>Healthcare Plans</p> </td> <td> <p>REIT - Industrial</p> </td> <td> <p>Hospitals</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>95.1</p> </td> <td> <p>35.9</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>Market Cap</p> </td> <td> <p>$2.2b</p> </td> <td> <p>$3.7b</p> </td> <td> <p>$2.7b</p> </td> </tr> <tr> <td> <p>Debt</p> </td> <td> <p>$350.4m</p> </td> <td> <p>$1.6b</p> </td> <td> <p>$4.8b</p> </td> </tr> <tr> <td> <p>Levered Cash Flow</p> </td> <td> <p>-$48.1m</p> </td> <td> <p>$197.1m</p> </td> <td> <p>-$34.3m</p> </td> </tr> <tr> <td> <p>Short Interest</p> </td> <td> <p>5.5%</p> </td> <td> <p>2.0%</p> </td> <td> <p>3.2%</p> </td> </tr> </tbody> </table>

The obvious answer for buying in Centene and Tenet Healthcare was President Obama's election victory. But, both stocks had already enjoyed extended gains, even when things were not looking so hot for Mr. Obama.  

Centene is a Medicaid HMO, a key sector to benefit from Mr. Obama's win.  But well in advance of the election, it had an earnings history of reporting close to analyst expectations, although it had a rough Q2 because of increased costs in Kentucky and Texas, in addition to problems from its Celtic individual health business.  These issues extended into Q3, when the company announced it was suing Kentucky for its failure to disclose material information.  The Kentucky case contributed to a $63 million loss for the quarter. Third quarter profits were down 87%, but it did manage to scrape a net profit of $3.8 million, versus the $55 million of the prior year's comparable quarter.  Revenue was up, but as the Kentucky case has proven - if monies out are greater than monies in, then the increased revenue is a bit of an illusion.  The relationship with Kentucky ends on July 5, 2013, although executives expect costs from withdrawal to continue through the end of 2013.  The combined loss from the three plans offered in Kentucky was $300 million for the first half of 2012. Then comes the costs of litigation, an item executives were cagey to address on their call; particularly if July 2013 does not prove to be the exit date from Kentucky.

Given the Kentucky fiasco, it could be 2014 before the company's earnings picture improves to something consistent.  Income forecasts were reduced to $0.56-0.66 for the current year, down from $0.95-1.15. But it would appear buyers are prepared to look past its current troubles and buy in advance for a better coming year.

Tenet Healthcare has also enjoyed steady improvement in quarterly earnings over the last couple of years.  From a situation where it was barely reporting a profit in 2009, it now comfortably reports strong quarters, even if it does occasionally, come in under expectations.  This quarter didn't deliver what analysts expected, but at $0.28 a share it comfortably beat the comparable quarter of $0.08 from last year. The bad debt provision increased to 8.5%, but the Affordable Care Act will reduce, and perhaps, eliminate the bad-debt provision once it goes into effect in 2014. Expectations have been lowered for the rest of year, further diluted by an increase year-on-year in the number of shares outstanding, although the company is engaged in a $500 million share buyback.  An adjusted earnings-per-share of between $1.83 and $2.12 is expected for the year.  Part of the reason for lowered expectations was a procedural delay for the managed care portion of California's Provider Fee program - resulting in a $40 million carryover in revenue to 2013. Where there are concerns going forward, it's on the ability of its customers to pay (because of the economy), and subscription volumes.

Both Healthcare companies operate under negative cash flow, so both are heavily dependent on financing to service their existing debt and have the necessary funds to run their businesses.  Tenet Healthcare carries a greater amount of debt, but has a better Levered Cash Flow than Centene. Centene is to sell $150 million in senior debt offering, while Tenet completed an $800 million offering in October.  It's important that neither company allows its Levered Cash Flow or its total Debt Load get away from them.

The third stock, Extra Space Storage, has taken a leaf from Apple's playbook of rewarding investors, and in recent weeks has gone one step better, by enjoying ever higher and higher stock prices.  All this from a Self-Storage company! Recent buying volume has not yet suggested a break is in the offing, although much of this volume was tied to the 5.9 million shares of common stock publicly offered.

Strong earnings have been a staple for the stock.  The company supports excellent same-store growth of 6.6% year-on-year, and tight supply in the market has supported increased rates (by 5%) without a decrease in occupancy, which stands at 90%.  High occupancies are reported from competitors too.  This strong environment has allowed for a reduction in discount offerings, which has supported an 11% increase in same store operating income, up from the 7% of the year before.  However, given the high occupancy, there is probably little wiggle room to fuel same-store growth, other from rate increases. 

If there is to be new growth, it will have to come from new storage facilities.  Extra Space Storage has taken advantage of a weak real estate environment to make property acquisitions to fund further expansion.  The total property expenditure will come to $0.5 billion by year end, financed by competitive low interest rate loans.  However, banks have been reluctant to lend to start new construction on acquired properties.   So turning such properties into revenue generators is going to take years, but it does mean it can be more aggressive on pricing existing storage.

Guidance for the year has increased to $1.56 to $1.58 per share.  Contributing to this is Hurricane Sandy as such events tend to benefit storage companies, offset somewhat by damage to properties and claims made against its insurance segment.  But the outlook for 2013 looks very good. 

Strong earnings are coupled with a reasonable dividend yield of 2.3%.  The yield has sharply improved since its sharp hair cut in 2008, and it can comfortably fork out $85 million in such payments when cash flow is $197 million.  Its total dividend payment is close to 2008's, and there is probably room for more.

All three stocks offer good opportunities going forward, and are attracting buyers with good reason.  When searching for the next market leaders, stocks such as these are well positioned to lead the next rally out. 

fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus