Five Hospital Stocks to Buy Now

The second half of 2015 has been tragic for hospital stocks. With concerns of a growing number of uninsured patients who can’t pay their medical bills on the rise, most hospital stocks have been punished heavily in the last few months. The erosion in market capitalization of some of these companies has been so significant that now they are trading at levels last seen in 2012. With this in mind, we have compiled a list of hospital stocks worth buying based on their popularity among hedge funds we follow at the end of the third quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Universal Health Services, Inc. (NYSE:UHS)

-Hedge Funds with Long Positions (as of September 30): 44

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.04 billion

Universal Health Services, Inc. (NYSE:UHS)’s stock rose by 30% during the first seven months of the year, but has corrected considerably since then and now trades almost flat for the year. During the third quarter, when the stock dropped by 12%, the number of funds that were long in the company declined by six and the aggregate value of investors’ holdings also saw a drop of over 33%. For the third quarter of fiscal 2015, the company reported EPS of $1.53 on revenue of $2.23 billion versus analysts’ estimate of $1.55 and $2.22 billion, respectively. Billionaire Israel Englander’s Millennium Management reduced its stake in the company by 26% to 827,007 shares during the July-September period.

#4 Tenet Healthcare Corp (NYSE:THC)

-Hedge Funds with Long Positions (as of September 30): 44

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.18 billion

Tenet Healthcare Corp (NYSE:THC) has lost more than half of its market capitalization since the start of second-half of 2015. However, it suffered only a minor drop in popularity among hedge funds during the third quarter with the number of funds long the stock having declined by four during the third quarter. On December 16, analysts at Credit Suisse initiated coverage on Tenet Healthcare Corp (NYSE:THC)’s stock with a ‘Neutral’ rating and a $33 price target. Larry Robbins‘ Glenview Capital – which was the largest shareholder of the company at the end of third quarter – has been making full use of the decline in Tenet Healthcare Corp’s stock during the fourth quarter by purchasing more shares; it holds almost 17.9 million shares of the company, according to its latest SEC filings.

#3 Community Health Systems (NYSE:CYH)

-Hedge Funds with Long Positions (as of September 30): 59

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.17 billion

Community Health Systems (NYSE:CYH) has had a similar trend to Tenet Healthcare Corp this year and currently trades down by more than 53% year-to-date, which, however, has also made the stock of Community Health Systems (NYSE:CYH) highly lucrative. It currently trades at a forward price-to-earnings multiple of 6.58 and price-to-book multiple of 0.69, which is considerably cheaper than its peer group. The company is currently engaged in spinning off  ‘Quorum Health Corporation’ as a separate trading entity; this spin-off is expected to get completed in the first quarter of 2016. Samuel Isaly‘s Orbimed Advisors increased its stake in the company by 78% to over 2.7 million shares during the third quarter.

#2 Brookdale Senior Living, Inc. (NYSE:BKD)

-Hedge Funds with Long Positions (as of September 30): 66

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $2.17 billion

Brookdale Senior Living, Inc. (NYSE:BKD) is an outlier in this list because even though its shares slumped by over 33% during the third quarter, its popularity among hedge funds grew during that period as two more funds among the 730 funds covered by us reported a stake in the company as of the end of third quarter. Several activist investors have been pushing the company to spin-off its real estate holdings into a REIT and if the company fails to do so by the beginning of march, the proxy date, the investors can nominate directors to Brookdale Senior Living, Inc. (NYSE:BKD)’s board. Thomas Ellis and Todd Hammer‘s North Run Capital doubled its stake in the company to 5.1 million shares during the third quarter.

#1 HCA Holdings Inc (NYSE:HCA)

-Hedge Funds with Long Positions (as of September 30): 71

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $3.75 billion

Despite the number of hedge funds with ownership in HCA Holdings Inc (NYSE:HCA) declining by 12 and the aggregate value of investors’ holdings falling by $1.26 billion during the third quarter, HCA Holdings Inc (NYSE:HCA) still remained the most popular hospital stock among the funds we track at the end of September. The company is scheduled to report its fiscal 2015 fourth quarter results in January and analysts expect it to report EPS of $1.34 on revenue of $10.16 billion. On December 17, analysts at Goldman Sachs downgraded the stock to ‘Neutral’ from ‘Buy’, while keeping their price target constant at $80. Billionaire John Paulson‘s Paulson & Co continued to own over 4.7 million shares of the company at the end of the third quarter.

Disclosure: None