Why Does Smart Money Like Kindred Healthcare, Inc. (KND)?

Kindred Healthcare, Inc. (NYSE:KND) is a healthcare services company that operates hospitals, home health, hospice, nursing centers, and non-medical home care locations across the United States. As of June 30, 2016, Kindred Healthcare had around 101,800 employees providing healthcare services in 2,684 locations across 46 states, including 97 transitional care hospitals, 92 nursing centers, and 617 Kindred at Home home health units.

In this article, we take a closer look at Kindred Healthcare and we analyze how the smart money investors from our database traded the stock in the second quarter.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

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Since the middle of 2015, Kindred Healthcare, Inc. (NYSE:KND) shares have declined due to worries over a potential recession, a tight labor market, unfavorable payer mix, lower utilization in its hospital division, and the potential negative impact of the new LTAC criteria beginning in September 1, 2016 on Kindred Healthcare’s bottom line. Further adding to the bearishness was a judicial ruling in May that might lead to lower government reimbursements to health insurers for the Affordable Care Act.

Nevertheless, shares of Kindred Healthcare are currently more than 37% higher than their February lows. Worries over a potential recession have diminished as the Fed remains accommodative. Labor inflation hasn’t been as bad as expected and Kindred’s second quarter earnings were strong with adjusted earnings coming in at $0.38 per share versus analyst estimates of $0.34 per share. Outlook is robust, with management reaffirming 2016 revenue guidance of $7.2 billion to $7.3 billion and 2016 core diluted EPS of $0.80 to $1.

The worries over the new LTAC criteria may prove overblown. At Kindred Healthcare’s current price, the market is pricing in the near-worst case scenario for Kindred Healthcare’s LTAC segment, which makes up less than 40% of Kindred Healthcare’s pro-forma EBITDAR. The market is basically assuming that Kindred Healthcare will not add any incremental compliant patients and that the division will lose substantial reimbursement for the company’s non-compliant patients. The market expectations are contrary to previous commentary where management said that they do not expect much of a sharp change. Kindred Healthcare management has also mitigated some of the LTAC risk by actively selling some of its LTACs. By the end of the third quarter, Kindred Healthcare should have a little more than 80 LTAC facilities, down substantially from the 116 facilities it had three years ago.