Larry Robbins (Trades, Portfolio), founder of hedge fund Glenview Capital Management, rearranged his health care holdings rather than cut his exposure to the sector in the third quarter, amid sinking returns and before the release of an apologetic shareholder letter.
"The last 90 days have been exceedingly disappointing and frustrating. I've failed to protect your capital, and mine, from a significant drawdown, despite a flat market,” Robbins wrote in an Oct. 26 letter to shareholders.
Glenview has roughly 51.6% of its public equity portfolio in stocks from the health care sector, which slid 11% for the quarter. The drop hurt the firm, which declined 13.5% year to date through Oct. 16, according to data from HSBC.
As reasons for the drop, Robbins cited drug price hikes, the political climate, hedge fund repositioning and volatility in hospital earnings. A long-term investor, Robbins remained confident in the underlying fundamentals of his companies. His average holding period for his top three winners in 2013 was nine years, and for 2014 the average holding time for his top 20 winners was about three and a half years, he said in a talk at the Japan Society in February.
Robbins’ bets on health care have served Glenview well in the past. In the first 10 months of 2013, his Glenview Capital Opportunity jumped 84.2%, which placed it as the best-performing hedge fund according to an annual Bloomberg Markets ranking. Since 2010, the sector has never made up less than a third of his portfolio.
"While there is merit to each of these concerns,” he said of the problems plaguing health care stocks in his third quarter letter, “in aggregate we remain highly confident that these are transitory stock price factors that will self-correct because the underlying profit stability and growth, capital allocation, valuation and fundamental outlook all support meaningful equity price appreciation for the coming year and years.”
His firm has already seen the beginning of a turnaround, as the S&P 500 Health Care Index rose almost 7% so far in the fourth quarter, placing it up 3.4% year to date.
The basis of much of Robbins’ dealings in health care has been profiting from changes Obamacare spurred in the industry. Negative impacts rippled through the sector again today when the nation’s largest health insurer, UnitedHealth Group Inc. (UNH, Financial) announced today that it might cease participating in Obamacare plans, citing an inability to profit under the act’s conditions.
In the third quarter, Robbins significantly reduced its holdings in drug manufacturers, selling 9% of its largest AbbVie Inc. (ABBV, Financial), 21% of Endo International PLC (ENDP, Financial), 23% of Allergan PLC (AGN, Financial) and 49% of Mylan NV (MYL, Financial).
Robbins also bought or significantly increased stocks of health care providers.
Brookdale Senior Living Inc. (BKD, Financial)
Robbins’ largest increase was to Brookdale Senior Living Inc., a 2.01% portfolio weight after he added 51.2% more shares in the third quarter when its share price averaged $30. Robbins owned 17,641,415 shares in total of the position, equal to 9.6% of shares outstanding, which he started in the second quarter of 2014 and increased in each subsequent quarter. He has a total estimated loss on the position of 31% at its Friday price of $22.61 per share.
Brookdale Senior Living operates senior living communities in 46 states, as well as outpatient therapy, home health, personalized health and hospice services. The company has a $4.2 billion market cap and its shares fell 38% year to date.
The company’s reported revenue for the third quarter to $1.2 billion from $1.08 billion the previous year due to an acquisition and the addition of new units. It reported $68 million in net loss, from $37 million the previous year.
Brookdale had $70.4 million in cash at quarter end, down from $104 million at the end of 2014, and long-term debt of $716 million, down from $877.8 million at year end.
Brookdale also has a P/B ratio near a five-year low at 1.6 and P/S ratio near a three-year low at 0.85.
HealthSouth Corp. (HLS, Financial)
Robbins increased his HealthSouth holding by 52% to 6,819,080 shares at an average price of $44. His holding spans 1.3% of his portfolio and 7.5% of the company’s outstanding shares. Robbins has boosted his share count for the past three quarters since starting the position and has a 20% loss approximately based on its $35.16 share price Friday.
HealthSouth is a large post-acute health care services and home-based patient care company. The $3.21 billion market cap company saw its shares decline almost 9% year to date.
For the third quarter, HealthSouth reported 30.4% higher revenues of $768.6 million, primarily from the acquisition of Encompass Home Health and Hospice and its inpatient rehabilitation hospitals. It posted net income of $51 million, up from $50 million.
HealthSouth ended the quarter with $801.6 million in cash, up from $66.7 at year end, and $2.8 billion in debt, up from $2.1 billion at year end.
The company has a P/E ratio of 19.2, P/B ratio of 5.07 and P/S ratio of 1.19, close to a two-year low.
Tenet Healthcare Corp. (THC, Financial)
Robbins owned 16.6% of Tenet Healthcare Corp. after increasing his holding by 11.5% in the third quarter. The 17,890,230 shares he held (including two more position increases in the fourth quarter) totaled 3% of his portfolio. Robbins started the position in the first quarter of 2012 and has an approximate 14% total gain on it at Friday’s price of $31.33 per share, which is close to a two-year low.
Tenet Healthcare is a healthcare services company operating 87 hospitals, 20 short-stay surgical hospitals and hundreds of outpatient centers, along with nine facilities in the UK. The company has a $3.12 billion market cap and its stock price fell 38% year to date.
For the third quarter, Tenet reported %4.7 billion in net operating revenues, up from $4.2 billion. It posted $28 million in net income, up from $18 million. The company ended the quarter with cash of $450 million, up from $193 million at year end, and debt of $14.6 billion, up from $11.7 billion.
Tenet announced a $500 million share repurchase authorization due to volatility and increased cash resulting from divestitures. The company has a P/E of 235.5, P/B of 3.9 and P/S ratio of 0.18, near a five-year low.
In his smaller moves with health care providers, Robbins increased HCA Holdings Inc. by 6.5%, started a position in Kindred Healthcare Inc. (KND, Financial), left his Community Health Systems Inc. position unchanged and decreased his Universal Health Services position by less than 1%.
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