Sick Economics

Searching For Healthy Profits In The Stock Market


Best Healthcare Value Stocks 2019
Who doesn’t love a nice Christmas sale? Everyone loves to pick up some good bargains around the holidays. When we talk about spending money, every retailer in the world advertises their big deals. But when we talk about making money, those deals may not be so obvious...

Your 3 Best Bets For Healthy Stock Market Profits In The Healthcare Industry For 2019.

Who doesn’t love a nice Christmas sale? Everyone loves to pick up some good bargains around the holidays. When we talk about spending money, every retailer in the world advertises their big deals. But when we talk about making money, those deals may not be so obvious. Yet, the initial price you pay for a stock may be the single biggest factor in the return you earn on your investment over the years. As the old adage goes, “you don’t make money when you sell; you make money when you buy.”

Here are three solid value plays that will help you enter 2019 on an optimistic note. Some have simply been overlooked by the mainstream media, while others have been outright scorned by analysts and pundits. We’ll help you find the value that the talking heads have missed, and we will explain why we think each of these names could earn you outsized returns over time. After all, even Santa would tell you that knowledge is the gift that keeps on giving….


1) Gilead Life Sciences ($GILD)

For many, poor Gilead may serve as a cautionary tale. However we firmly believe that this story could still have a fairy tale ending.

Gilead is one of the original biotech legends that rose to prominence as a pioneer in the fight against HIV. If luminaries such as Magic Johnson continue to enrich our world, we largely have the founding team at Gilead to thank. After making a name (and a multi-billion dollar market capitalization) fighting HIV, the company really started flying high with its next innovation; a cure for Hepatitis C. With HIV, Gilead had made history by inventing new ways to restrain a once deadly virus; with Hepatitis C, the company actually took the next step and cured the disease, once and for all.

But eventually, every high flyer soars too close to the sun. Gilead’s legendary success also contained the roots of its own downfall. Simply put, in the most honest terms: it turns out that totally curing a disease isn’t great for business. Gilead did such a good job curing a once untreatable scourge that the number of eligible Hepatitis C patients has dwindled.

Gilead also became a living example of textbook economics. When Gilead’s initial Hep C cure hit the markets, it made headlines not only for its efficacy, but also for it’s record high price. Initially, Gilead was able to demand in excess of $100,000 for a unique treatment to a formerly untreatable disease. But of course that high price drew competition, and new, additional ways of attacking Hep C were created by rivals who wanted a piece of the action. Just as they would teach you in any Econ 101 class, these new competitors have driven down the price that Gilead can charge for it’s Hep C wonder cure. In this case, the economics of the free market have functioned miraculously well for patients, but not so great for Gilead.

A shrinking market of Hep C patients plus new competition has led Gilead’s share price to tumble from an all time high of $120 to just $70 today. To the short sighted analyst, this would seem like a well deserved mark down; after all, revenues and profits have been heading in the wrong direction.

But we see several catalysts for value creation in this case. We feel that $GILD is now on deep discount.

1) Even with the Hep C glory days behind them, Gilead Life Sciences is still an absurdly profitable enterprise. For the last two reported quarters (Q3 and Q2, 2018) the company generated an operating profit in the $2.5 billion range on revenue of $5.5 billion. That is AFTER investing in R&D, etc. This means that not only can they sustain their juicy 3.5% dividend, they can actually continue to INCREASE the dividend, even with with the topline trending in the wrong direction.

2) Most importantly, the continued extreme profitability of the core enterprise has left Gilead’s management with plenty of “dry powder” (capital) to buy and/or build the next blockbuster franchise. Even AFTER paying the dividend, the company has plenty of free cash to hoover up promising young start ups. They currently have $28 Billion in cash on their books, and very little debt.

3) They have already begun to demonstrate significant returns on investments they have made with that prodigious cash flow. About a year ago Gilead decided to focus on cancer as its future revenue driver. It’s first move in that endeavor was to purchase Kite Pharmaceuticals, a buzzy biotech start up with a new kind of immunotherapy treatment called Car-T. Kite had just gained approval for it’s first therapy derived from Car-T, a new compound called Yescarta. The idea was that Gilead would not just be getting one new treatment, but a promising pipeline of products and scientists that it could nurture to maturity.

Apparently this idea is about to payoff in a big way. Just last week, the company unveiled new data highlighting the shocking potential of the Car-T therapy pipeline that it acquired through Kite. The company’s own description of it’s latest investigational findings:

With a median follow-up of 15.1 months (range 3.7 — 28.6 months) following a single infusion of KTE-X19, 69 percent of evaluable patients achieved complete tumor remission, defined as complete remission recovery (CRi)…… The rate of undetectable minimal residual disease (MRD) in patients who achieved complete tumor remission was 100 percent.

In other words, Gilead’s new experimental compound totally cured 69% of leukemia patients, with no detectable cancer in their bodies as long as two years after treatment. Giving life back to people who would have been defined as “goners” just ten years ago. Isn’t that why we got into this business?

You would think that Gilead’s share price would skyrocket after this kind of news. The market’s reaction? Yawwwwn. No change in share price, at least as of yet.

If you aspire to be the Wayne Gretzky of investing, then follow these words of advice from The Great One: Don’t skate to where the puck is. Skate to where to puck is going.

In this case, we feel like Gilead may well be scoring a lot of goals in the future. Get skating!


2) Sabra Healthcare REIT, Inc. ($SABRA)

“It’s a dirty job, but somebody’s gotta do it.” That is the value proposition for Sabra Healthcare REIT Inc, in just one sentence.

Healthcare REITs are a special kind of publicly traded corporation that owns real estate where healthcare services are delivered. Typically the REIT only owns the underlying real estate, and not the operational business. REITs enjoy special taxation status as long as they pay out most of their cash flow to shareholders.

Some kinds of healthcare real estate are more in favor than others. The most scorned of the category are REIT’s that house SNF’s, or Skilled Nursing Facilities.

Why would these kinds of REITS be out of favor? Do the evil warlocks that run Wall Street hate nurses? Do they despise senior citizens?

Well, it turns out Wall Street High Flyers love senior citizens as long as they are rich senior citizens. Old poor folks, not as much. Reits such as $SABRA are out of favor because they mostly cater to broke old folks, and most of the corporation’s revenue comes from government payors such as Medicare and Medicaid. One look at Uncle Sam’s mountain of growing debt, and yawning budget deficit, is enough to make any potential investor gulp hard.

But that hard gulp is where the opportunity lies. Wall Street is right that growing federal and state budget gaps, combined with a never ending flood of broke seniors who need Medicaid, may create a national funding crisis for nursing homes. But sad to say, we can’t wish grandma away. According to the Population Reference Bureau, a non profit research organization,

The aging of the baby boom generation could fuel a 75 percent increase in the number of Americans ages 65 and older requiring nursing home care, to about 2.3 million in 2030 from 1.3 million in 2010.
Note the emphasis on the word “require.” Not optional. There will be budget struggles and cuts to come; but unless our society deteriorates to the point where we are literally pitching our elderly onto the streets, they will continue to cling to life, and demand for special housing will only increase.

So, if we want to capitalize on low valuations induced by panic stricken securities analysts, we would simply seek out the strongest players in a rough market. That very same rough market will make the strong stronger as the weaker players wash out.

Sabra is one such solid player. The current dividend, tempting as it hovers in the 9% range, is well covered by cash flow. In other words, Sabra’s dividend isn’t unusually high, its stock price is unusually LOW.

The company has a modest debt load. It’s assets exceed its debts by a 2 to 1 ratio. This mean that the company is well positioned to buy out other, faltering REIT’s if the SNF market goes from tough to tougher.

Lastly, SABRA’s management are not tourists or speculators in a risky industry. Senior management has a combined 100 plus years of Health Care REIT experience, and the CEO, Rich Matros, has been with Sabra for 20 years or more. They know how to spot nursing home operators that are faltering, and how to best protect shareholders in these cases.

$SABRA may be one of those rare opportunities where we can make a pretty penny by investing in an ugly business.


3) General Electric ($GE)

Disastrous. Infuriating. Tragic. Choose any negative term you feel like; they pretty much all apply to what ex-CEO Jeffrey Immelt did to General Electric, once an icon of American Big Business.

When Immelt took the reigns, the share price was at an all time high of $60; when he was finally forced out 17 years later the shares traded at around $17. Today, shares have withered to just $7. In short, Mr. Immelt and his protege John Flannery ran this storied conglomerate into the ground. Plain and simple; they wrecked one of America’s foremost money machines.

But one man’s trash is another man’s treasure, and we feel that savvy investors could wind up walking away with the deal of a lifetime if they have the courage to buy while everyone else is selling.

There are three main reasons why we see value in $GE’s battered shares:

1) There is nothing wrong with GE Healthcare. New CEO Larry Culp has ninety nine problems, but healthcare ain’t one. The unit handed in 5% revenue growth through Q3 of 2018, and 8% profit growth. With $2.3 billion in profit on $14.3 billion in revenue, GE Healthcare remains unblemished by the disasters unfolding around it. This is probably why previous CEO John Flannery announced that the division will be spun off into a separate publicly traded company. Clean up man Larry Culp has not yet made any definitive statements about whether Flannery’s spin off plan will be modified or reversed. However, Culp is under immense pressure to raise cash to fund his turnaround effort; and the quickest route to that cash remains a total or partial spin off of GE Health.

2) The gangreen has been cut out. As Immelt and his protege Flannery have finally been removed, it has become painfully clear that the real culprit in GE’s downfall has been an insular, unaccountable culture. Larry Culp is the first outside CEO in nearly 100 years, and that new blood is desperately needed at the lumbering corporate giant. Culp has a sterling track record as an operations expert and deal maker. In short; it’s morning at GE.

3) The math behind corporate spin offs are often bizarro calculations that favor shareholders. Most people who would like to bet on GE Healthcare would find it logical to simply wait until separate shares are offered to the public, and then purchase shares only in the part of the company that really interests them. But that would ignore the fact that 2 plus 2 is often 5 with these spin-offs. That’s why Boards vote for them.

For example: GE’s total enterprise as a conglomerate is currently worth just $63 billion, or less than a third of what it was worth a few years ago. To some degree $GE earned this lowered valuation through a toxic cocktail of falling revenues, shrinking free cash flow, and nasty surprise expenses. But, as often is the case, bashing $GE and hitting the panic button have become favorite pastimes of the financial media, and skittish investors have “thrown the baby out with the bathwater.” If broken up skillfully, divisions such as GE Healthcare could add up to be much more valuable than the current tarnished whole.

For example, GE Healthcare has minted $2.3 Billion in profit during the first nine months of 2018. So, if it were a separate company today, GE Health would demonstrate an annual profit of about $3.5 Billion. If the separate, untarnished company were valued at just 12 times earnings, then the market capitalization of ONLY GE HEALTHCARE would be $42 Billion dollars……almost 75% of GE’s total value today. This would imply that GE’s other 6 divisions, TOGETHER, are worth less than $25 Billion. Something ain’t right.

In short, the irrational hysteria around GE’s fall from grace has created some valuations that are based on irrational math. Which equals a crazy opportunity for some brave investors.

As always, we would warn any potential investors that these recommendations are not for the faint of heart. We think you could make a lot of money this way, but we can’t guarantee it. What we can guarantee is that 2019 will be another year of exciting opportunities in the healthcare business, and we wish you the best of luck as you pursue these opportunities.


DISCLOSURE: The Sick Economist owns shares in the discussed companies.

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