I recently wrote up a pair of trade ideas focused in the healthcare sector, traditionally a “defensive” sector (one that outperforms during bear markets). Those have been a bit of a mixed bag with Davita falling a bit further from its writeup and Medpace soaring after its latest earnings announcement. Today, I have yet another opportunity in the healthcare sector to share.
Before I get to it, however, I want to clarify that I don’t apply a macro overlay to trade ideas. In other words, I don’t let macro concerns get in the way of taking advantage of micro opportunities. If I have concerns about the economy or the market in general I will find some way to hedge those risks directly rather than simply avoid taking any single stock risk at all. I also don’t specifically look for stock ideas that fit a macro thesis. That said, I do think it’s interesting that most of the compelling ideas I have found recently are defensive in nature. That would appear to confirm the bearish macro picture discussed in other reports.
With that out of the way, I noticed another intriguing insider buy recently by the Chief Financial Officer at Tenet Healthcare (THC). A few weeks ago, Daniel Cancelmi bought 11,000 shares at $43. This was his first purchase since buying 19,220 shares at $16 back in March of 2020, very near the low of the Covid crash. Two years after that purchase, the stock nearly hit $100 so you might say it was a well-timed trade. Trading by CFOs is something I pay especially close attention to; when they have a track record like this, it is even more compelling. So while this may be just a single purchase by an insider it is also a significant one.
Headquartered in Dallas, Texas (with former Dallas Fed Chief Richard Fisher on its board), Tenet is a major operator of medical facilities, namely hospitals and surgical centers. Obviously, through the pandemic and still to the this day, labor costs have been a major issue for the company. Elective surgeries that were put on hold during the pandemic have also not yet made the comeback the company had hoped. And rising interest rates also present an issue for a company with roughly $15 billion in long-term debt. Together, these issues help to explain the 50% decline in the stock since the start of the year.
Cancelmi, who has been with the company since 1999, seems to think that the decline in the stock price is overdone. Not only is he buying with his own money in the open market at an amount equal to two-thirds of his annual salary, he also announced a new $1 billion buyback plan during the company’s latest earnings conference call on October 20. This amounts to more than 20% of the company’s $4.6 billion market cap. Furthermore, Cancelmi noted on the call that this is an opportunistic buyback that was put in place to take advantage of the decline in stock price.
With THC trading at just 7-times forward earnings, matching its cheapest levels of the past decade, it’s not hard to see why Cancelmi sees an opportunity today in the stock prices. Even when factoring in the company’s large debt load by looking at enterprise value relative to EBITDA, the stock looks historically very cheap.
The question, as always, is: is the stock undeservedly cheap? Cancelmi addressed each of the issues noted above during the call. He related that labor pressures were beginning to abate to some degree, enough to allow the company to focus less on contract labor which is far more expensive than adding full-time employees. While it was slower than the company had hoped, volumes were also still recovering in its surgery centers. And the company had already targeted certain debt tranches to retire over the next few years, ameliorating the impact of rising interest rates.
If the company can execute on these issues, it’s not hard to how the stock could trade back to 15-times earnings or so, roughly the midpoint of the past decade’s valuation range. If earnings next year simply match this year’s level that would make for a nearly $100 stock price. Of course, if the company’s able to pull these things off, earnings could begin to grow again, yielding further upside potential for the shares.
From a technical perspective, there is good support at the $40 level. Back in 2018 and 2019, THC tested this horizontal resistance level and failed before finally breaking out in 2021. This year’s decline in the stock price has seen it fall right back to test that level from above. It’s such a simple and clean technical picture that it makes me wonder if Calcemi, in addition to his CPA license, also has a CMT designation (kidding).
You don’t often find stocks with both a margin of safety built into the valuation and a technical backstop like this. Let alone ones where the CFO is buying heavily with his own money and putting the company’s coffers to work in retiring equity at the same time. In all, Tenet looks like another good opportunity for investors to play defense in the stock market at a time when it makes a great deal of sense, both on a micro and macro level.
