Finding Alpha Amongst Obamacare

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How to invest for Obamacare was one of the topics this year at CNBC's Delivering Alpha conference. A number of top hedge fund managers chimed in to provide investors with their alpha-driven stock picks. Most notably, Larry Robbins, founder of Glenview Capital, touted his best ways to play the industry. He's making big bets on hospitals. 
 
Robbins notes that these companies operate in a very stable and defensive growth industry. He also believes that for-profit companies will be a major force in keeping healthcare costs lower than the most dire predictions.
 
Tenet Healthcare (NYSE: THC) and Health Management Associates (NYSE: HMA) are two of Glenview's top hospital stocks per the fund's 13F filing with the SEC. The two hospital operators, Tenet and Health Management, make up the fund's second- and third-largest holdings, respectively. 
 
Tenet's revenue is expected to be up 6.8% in 2013, and 6% in 2014. Other big news includes the fact that Tenet is looking to expand its network with the Vanguard Health Systems acquisition. The Vanguard acquisition will boost the company's position in South Texas, increasing Tenet's hospital facilities by 60% and outpatient facilities by 25%. 
 
As mentioned before, hospitals will be a big winner of the healthcare reform act, but Tenet should be one of the biggest winners. Tenet has the majority of its hospitals in the Texas, Florida and California areas, which also happen to have the highest percentages of un-and under-insured patients. 
 
Robbins' other favorite hospital operator, Health Management, continues to expand its service lines by adding specialists in areas such as neurology and cardiology. Health Management appears to be a solid buyout candidate. Glenview owns around 15% of the company and has been pushing it to remove its poison pill (15% threshold) for just this reason. 

One of Health Management's biggest opportunities lies in outpatient care. The company generates around 50% of revenue from outpatient services. A healthcare survey shows that in April, only one-third of hospitals thought inpatient admissions would rise in 2013, compared to two-thirds projecting a rise in outpatient admissions. 
 
Worth noting is that both hospital operators, Tenet and Health Management, trade with rather high betas (high volatility) at 2.2 and 2.6, respectively. Tenet also trades at over 60 times earnings, while Healthcare Management is at 25 times. 

Medical devices
 
Robbins also likes Thermo Fisher Scientific (NYSE: TMO)While the life sciences tools industry is highly fragmented, Thermo is looking to make the industry a little smaller. Back in April, Thermo announced plans to acquire Life Technologies for $13.6 billion. Life Tech also happens to be Glenview's top stock holding as of the end of 1Q. The acquisition makes sense given the complementary products the two offer. 
 
Robbins notes that growth slowed in the space of late due to sequestration cuts, but the hedge fund manager believes that organic growth will recover in 2014. The Thermo-Life combo would generate sales in excess of $16 billion, with a 25%-to-75% split for instrument sales versus recurring revenue. 

Thermo believes that the deal could be accretive to EPS by upwards of $1.00 in year one. Beyond the Life acquisition, Thermo is turning to emerging markets for growth. The company hopes that over 25% of revenue will come from Asia and emerging markets by 2016, compared to 10% in 2006. 
 
Bottom line
 
Glenview Capital likes hospitals, as do I. The big tailwind for the hospitals includes greater inpatient occupancy levels, which should be pushed higher as more individuals are covered with insurance due to the healthcare reform. Tenet and Health Management are two of the industry's top picks, with Tenet as an industry consolidator, while Health Management could be an acquisition target. Thermo has a leading position in the medical-device segment and its Life Tech acquisition will help boost the companies offerings and markets covered. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Thermo Fisher Scientific. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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