In this article, we discuss the 3 interesting stocks in Seth Klarman’s 2022 portfolio. If you want to read our detailed analysis of Seth Klarman’s investment strategy and hedge fund performance, go directly to 8 Interesting Stocks in Seth Klarman’s 2022 Portfolio.
3. Encompass Health Corporation (NYSE:EHC)
Percentage of Baupost Group’s 13F portfolio: 2.29%
Value of Baupost Group’s Stake: $213.33 million
Number of Hedge Fund Holders: 48
Encompass Health Corporation (NYSE:EHC) deals in the provision of post-acute healthcare services through its segments: Inpatient Rehabilitation, and Home Health and Hospice. Baupost Group increased its stake in the company by 319% in the first quarter, standing at 3 million shares worth $213.3 million. In contrast, the fund held 716,000 shares of Encompass Health Corporation (NYSE:EHC) a quarter earlier.
On April 7, Truist analyst David MacDonald reiterated a ‘Buy’ rating on Encompass Health Corporation (NYSE:EHC) shares, and raised the price target to $85 from $78. He maintains a positive stance on the underlying demand drivers and attractive tailwinds for the healthcare services industry, with the dissipating effects of Covid helping alleviate labor pressures and driving robust cash flows.
For Q1 2022, Encompass Health Corporation (NYSE:EHC) disclosed earnings per share of $0.97, above estimates by $0.05. The company recorded a revenue of $1.33 billion for the quarter, exceeding market estimates by $8.68 million. As of June 13, the company offers a 1.99% dividend yield to shareholders, with a dividend-paying history stretching back to 2013.
Heartland Advisors highlighted several stocks in its Q4 2021 investor letter, and Encompass Health Corporation (NYSE:EHC) was one of them. The fund said:
“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.”
