Silver Ring Value Partners recently released its Q4 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 26.6% for the last 12 months (net), outperforming its benchmark, the Russell 3000 Index which returned 20.9% in the same period. You should check out Silver Ring Value Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Silver Ring Value Partners’ highlighted a few stocks and Mednax Inc. (NYSE:MD) is one of them. Mednax Inc. (NYSE:MD) is a multi-specialty medical group with a national focus. In the last three months, Mednax Inc. (NYSE:MD) stock gained 58.6% and on January 15th it had a closing price of $23.60. Here is what Silver Ring Value Partners’ said:
“Mednax is a business that I have followed for many years. The crown jewel is the pediatric business, in which the company provides physician staffing to neonatal intensive care units (NICUs) and related specialties at various hospitals. It’s a business with a strong competitive advantage given the company’s dominant position, very inelastic demand and limited reimbursement risk.
The pediatric business has moderate organic growth characteristics, which the prior management supplemented with many tuck-in acquisitions over the years. These acquisitions leveraged the back office scale while allowing the local physician groups’ autonomy of operation.
Unfortunately, the company eventually ran out of meaningful acquisitions to make in this space, and the old management was unsatisfied with simply running a very entrenched, high ROIC and FCF business and returning capital to shareholders. Instead, they took on extra debt to pursue growth through acquisitions in what they considered to be adjacencies: first in anesthesiology and then in radiology.
Not surprisingly, these adventures outside the company’s area of core competitive advantage didn’t go well. Debt piled up far faster than profits. This led to an activist investor nominating directors to the board, and then the board replacing the CEO.
The new CEO was previously the CEO of Quality Care Properties. This was a company where he improved performance over this 2-year tenure and which he then sold at an attractive price. His first steps at Mednax were simple: sell off the non-core divisions and reduce debt.
I made the investment after the sales were completed, leading to a clean balance sheet and the company returning to its roots as a pediatric-centered company. This company doesn’t screen well to many investors since its historical financials are messy and are obscured by the old businesses (now sold) and the seemingly large debt pile (already reduced). This is a perfect set-up: the nature of the business is different than what most investors believe it to be based on a superficial assessment.
The new management is now focused on improving efficiencies and running the core business better. I would not be surprised if the ultimate plan were to sell the company in a few years at a nice profit. However, I am not banking on that, and would be equally happy if management just executes on its low-risk plan of running the business well within its area of competitive advantage.
I purchased the stock at less than 10x normalized EPS for a business that I believe is likely to grow mid-single digits long-term. I paid ~ 65% of my base case value with ~ 35% downside to my worst case. I believe the Business Quality to be Excellent (1 out of 5), Management Quality to be Above Average (2 out of 5) and Balance Sheet to be Above Average (2 out of 5).
In the short-term, birth-rates, a key driver of demand, are likely to be negative. This may create quarters where the company reports results lower than Wall Street expectations. I am not at all concerned or deterred by that. If anything, I would be happy to add to the position if such an event occurs and the market over-reacts given our long-term investment horizon.”
In November 2020, we published an article revealing that Mednax Inc. (NYSE:MD) was one of the 5 best catalyst-driven value stocks to buy now.
In Q3 2020, the number of bullish hedge fund positions on Mednax Inc. (NYSE:MD) stock decreased by about 4% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in Mednax’s growth potential. Our calculations showed that Mednax Inc. (NYSE:MD) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
