Is Kindred Healthcare, Inc. (NYSE:KND) a buy right now? The smart money thinks so. The number of bullish hedge fund bets went up by 1 during the first quarter. More importantly, there are noticably a large number of hedge funds invested in the stock. In this article we will share Corsair Capital’s views on KND. But first, let us explain why we even care about what hedge funds think about these stocks.
Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 80 percentage points since the end of August 2012 (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.
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Corsair Capital talked about its KND position in its 2015 Q1 investor letter. We like Corsair Capital because Corsair Select fund delivered a net return of 13.6% annually since its inception at the beginning of 2004. S&P 500 Index returned only 7.9% during the same period. Corsair Select also returned 6.1% during the first quarter, outperforming the S&P 500 by more than 5 percentage points. Here is what they said:
“Kindred Healthcare, Inc. (“KND”) rose 31% in the first quarter. KND is a leading operator of long-term acute care, rehabilitation and nursing centers across the U.S. During the quarter, the company completed a transformational transaction – the acquisition of Gentiva Healthcare, making KND the largest post-acute provider in the country with over 100,000 healthcare employees. We believe the “new” KND is a stronger, more diverse company which, assuming synergies should generate normalized free cash flow of $3/share. The market had three primary reservations about the deal: 1) financing terms, 2) synergy estimates and 3) diversification, as Gentiva operates home healthcare vs. KND’s history of operating in-facility. We saw something different: 1) the financing would be completed at reasonable terms, 2) KND had a long track record of materially exceeding initial synergy estimates and 3) diversification into home healthcare is a positive, not a negative. While sentiment has improved since the February closing, we still believe KND should trade at 10-12x normalized FCF or between $30-36/share. KND closed the quarter at $23.79.”
Keeping this in mind, we’re going to check out the key action surrounding Kindred Healthcare, Inc. (NYSE:KND).
Hedge fund activity in Kindred Healthcare, Inc. (NYSE:KND)
Heading into Q2, a total of 35 of the hedge funds tracked by Insider Monkey were long in this stock, a change of 3% from one quarter earlier. This is a very large number for a stock that has less than $2 billion in market cap. This is definitely a strong bullish sign.
When looking at the hedgies followed by Insider Monkey, Conan Laughlin’s North Tide Capital had the largest position in Kindred Healthcare, Inc. (NYSE:KND), worth close to $131.2 million, amounting to 9.9% of its total 13F portfolio. Sitting at the No. 2 spot is Ross Margolies of Stelliam Investment Management, with a $81.8 million position; 1.8% of its 13F portfolio is allocated to the stock. Some other hedge funds with similar optimism include Clint Carlson’s Carlson Capital, Arthur B Cohen and Joseph Healey’s Healthcor Management LP and Jacob Gottlieb’s Visium Asset Management.
As industrywide interest jumped, key money managers have jumped into Kindred Healthcare, Inc. (NYSE:KND) headfirst. Healthcor Management LP, managed by Arthur B Cohen and Joseph Healey, established the biggest new position in Kindred Healthcare, Inc. (NYSE:KND). Healthcor’s 46.6 million position at the end of the first quarter was also a new position. Joel Greenblatt’s Gotham Asset Management also initiated a $30.9 million position during the quarter. The other funds with brand new KND positions are Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital, Sanford J. Colen’s Apex Capital, and Peter Muller’s PDT Partners.
Kindred shares declined by about 15% since the end of the first quarter. We think the stock is even more attractive now compared to April 23rd when Corsair Capital penned its investor letter. We believe Kindred shares are likely to outperform the market in the next 12 months.
