Is HCA Holdings Inc (HCA) A Good Stock To Buy?

As we already know from media reports and hedge fund investor letters, many hedge funds lost money in the third quarter, blaming macroeconomic conditions and unpredictable events that hit several sectors, with healthcare among them. Nevertheless, most investors decided to stick to their bullish theses and their long-term focus allows us to profit from the recent declines. In particular, let’s take a look at what hedge funds think about HCA Holdings Inc (NYSE:HCA) in this article.

HCA Holdings Inc (NYSE:HCA) investors should pay attention to a slight decrease in support from the world’s most elite money managers of late. HCA was in 67 hedge funds’ portfolios at the end of December. There were 71 hedge funds in our database with HCA positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Imperial Oil Limited (USA) (NYSEAMEX:IMO), Korea Electric Power Corporation (ADR) (NYSE:KEP), and State Street Corporation (NYSE:STT) to gather more data points.

To most market participants, hedge funds are viewed as unimportant, outdated investment vehicles of years past. While there are more than 8000 funds trading at the moment, Our experts choose to focus on the bigwigs of this group, about 700 funds. These investment experts handle the majority of the smart money’s total capital, and by paying attention to their best investments, Insider Monkey has unearthed several investment strategies that have historically defeated Mr. Market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Larry Robbins’ Glenview Capital, which ranks as the largest shareholder of HCA in our database, is betting big on h0spitals operators. The fund discussed in detail its bets in the industry in the third-quarter investor letter. Read on to see what the fund said about HCA.

“In hospitals, we saw a negative pre-announcement from HCA, its first negative earnings report since Q1 2013, and we also saw a more severe earnings miss at Community Health. This is exceedingly frustrating to us because each company met with the investment community at conferences in mid-September and exhibited no signs of concern or caution regarding the overall environment. Our own industry checks suggested normal operating conditions and gave us no indication or cause for concern. THC has yet to report, but given the extreme share price movements, the company reiterated 3Q15 profitability guidance – despite this reiteration its shares remain 14% lower than prior to the HCA announcement and 48% lower than June 30th.

In a utopian world, all companies would smoothly and soundly meet or beat expectations each quarter. Unfortunately, we have yet to find utopian investments in 15 years that trade at reasonable prices. As you know, we find the hospital industry fundamentally attractive for its overall growth, basic service it provides, industry structure that promotes modest price increases, and the strong opportunities available for capital allocation. During the past 18 quarters during which we have invested in hospitals, there have been 29 significant EBITDA beats (in excess of 4%) and nine significant EBITDA misses (same measure) by and amongst our four hospital holdings. Said differently, in just over half of the earnings reports there is a significant beat or miss. While we understand and accept that there is always timing volatility surrounding admissions and reimbursements, compliance costs and staffing levels, the industry has demonstrated a strong track record of both growth and resiliency across the major hospital chains with 6% organic EBITDA growth over the period, and we expect significant continued EBITDA and free cash flow growth going forward. Furthermore, less than half of this period included the benefits of the Affordable Care Act (“ACA” or “Obamacare”), reflecting the strong and recurring EBITDA growth opportunities driven by demographics, scale and leverage from improving care, quality and reimbursement.

In prior periods, this quarterly volatility was well absorbed by the market, with the exception of HCA in mid-2011 in its first quarter as a returning public company. During the last few months, we have seen peak to trough declines of nearly 60% in the shares of two of our holdings, an unprecedented and unwarranted reaction. We strongly believe that this reflects short-term fears of investor positioning rather than any rational measure of fundamental value, and we will remain engaged with each management team to pursue alternatives for them to create value despite a very weak current equity price. Companies continue to exhibit strong free cash flow and dry powder (for example, industry leader HCA, who repurchased more than 24% of its shares since its re-IPO in 2011, has more than 50% of its market capitalization in dry powder through 2017). With our hospital holdings trading at 6.5x 2017 EBITDA and approximately 9x 2017 earnings, and the coverage expansion from the ACA now proven and accepted, capital allocation opportunities abound.”

Keeping this in mind, let’s take a peek at the key action regarding HCA Holdings Inc (NYSE:HCA).

Hedge fund activity in HCA Holdings Inc (NYSE:HCA)

Heading into 2016, a total of 67 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the previous quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Larry Robbins’ Glenview Capital has the largest position in HCA Holdings Inc (NYSE:HCA), worth close to $967.1 million, corresponding to 5.4% of its total 13F portfolio. The second most bullish fund manager is Samuel Isaly’s OrbiMed Advisors, with a $402.8 million position; the fund has 3.6% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions consist of Jeffrey Tannenbaum’s Fir Tree, David Tepper’s Appaloosa Management LP and Cliff Asness’ AQR Capital Management.

Due to the fact that HCA Holdings Inc (NYSE:HCA) has faced a declination in interest from hedge fund managers, it’s safe to say that there is a sect of fund managers who sold off their positions entirely during the fourth quarter. At the top of the heap, John Paulson’s Paulson & Co said goodbye to the biggest position of the 700 funds tracked by Insider Monkey, worth close to $364.5 million in stock, and Jeffrey Gates’ Gates Capital Management was right behind this move, as the fund cut about $101.9 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by four funds heading into 2016.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as HCA Holdings Inc (NYSE:HCA) but similarly valued. We will take a look at Imperial Oil Limited (USA) (NYSEAMEX:IMO), Korea Electric Power Corporation (ADR) (NYSE:KEP), State Street Corporation (NYSE:STT), and American Airlines Group Inc (NASDAQ:AAL). This group of stocks’ market valuations resemble HCA’s market valuation.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $787 million. That figure was $3.82 billion in HCA’s case. American Airlines Group Inc (NASDAQ:AAL) is the most popular stock in this table. On the other hand Imperial Oil Limited (USA) (NYSEAMEX:IMO) is the least popular one with only 8 bullish hedge fund positions. HCA Holdings Inc (NYSE:HCA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard AAL might be a better candidate to consider a long position.