Third Point’s Daniel Loeb (Trades, Portfolio) disclosed earlier this week he reduced his firm’s stake in Cano Health Inc. (CANO, Financial) by 26.1% as the stock continues to decline this month.
Taking an event-driven, value-oriented approach to stock picking, the guru's New York-based hedge fund is known for entering activist positions in underperforming companies with a catalyst that will help unlock value for shareholders.
Cano Health investment
While the activist investor’s third-quarter equity portfolio has not yet been released, GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, showed Loeb sold 2.83 million shares of the Miami-based health care company on Oct. 21, impacting the equity portfolio by -0.29%. The stock traded for an average price of $4.29 per share on the day of the transaction.
He now holds a total of 8 million shares, which occupy 0.81% of the equity portfolio. GuruFocus estimates Loeb has lost 70% on the investment since establishing it in the second quarter of 2021.
The company, which operates primary care centers and supports affiliated medical practices that specialize in primary care for senior citizens, has an $876.89 million market cap; its shares were trading around $3.68 on Friday with a price-book ratio of 1.92 and a price-sales ratio of 0.43.
Since going public via special purpose acquisition company in June of 2021, Cano Health’s shares have deteriorated, falling around 75%.
Although the broader health care sector has also languished so far this year on the back of high inflation, rising interest rates and continued headwinds from the Covid-19 pandemic, tumbling nearly 50%, Loeb noted in his third-quarter shareholder letter that Cano was one of the “top five winners” for the period, though he did not provide any other details about the investment.
In a previous filing made in March, the investor said that while he had “confidence” in Cano Health’s operating strategy and management team, he was not pleased with its performance.
Due it its sluggish stock performance at that time and the fact it went public via SPAC, the guru encouraged the company’s board to put it up for sale or explore other strategic alternatives to address the “value gap” between its share price and intrinsic value.
Earnings update
Cano Health reported its second-quarter financial results on Aug. 9.
For the three months ended June 30, the company posted revenue of $689.4 million, which increased 101% from the prior-year quarter. The net loss of $14.6 million, or 3 cents per share, also improved from a loss of $36.3 million, or 22 cents per share, last year.
The company also recorded an 80% increase in its total number of memberships to 281,525, which included 163,947 Meidcare capitated members.
In a statement, Cano Chairman and CEO, Dr. Marlow Hernandez, commented on the strong membership growth.
“We expect new higher acuity members, while pressuring current performance, will provide opportunities for more profitable results going forward as we leverage our population health platform to improve the health of these patients,” he said. “Furthermore, we will continue to capitalize on our market leading position and the societal tailwinds that underpin the strong demand for the Cano Health model of care.”
Looking ahead, Cano Health also updated its guidance for the full year. For 2022, it expects total revenue to be between $2.85 billion and $2.9 billion. Memberships are projected to fall in the range of 300,000 to 305,000.
The company is scheduled to report its third-quarter results after the closing bell on Nov. 9.
Financial strength and profitability
GuruFocus rated Cano Health’s financial strength 3 out of 10. On the back of unimpressive debt-related ratios, the low Altman Z-Score of 1.44 warns the company could be at risk of bankruptcy if it does not improve its liquidity. Further, the Sloan ratio is indicative of poor earnings quality.
The company’s profitability fared even worse, scoring a 2 out of 10 rating as its negative margins and returns on equity, assets and capital are all underperforming versus the majority of competitors.
Guru ownership
Of the gurus invested in Cano Health, Lee Ainslie (Trades, Portfolio) now has the largest stake with 3.60% of its outstanding shares. Loeb has the second-largest position with a 3.31% stake. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) also own the stock.
Portfolio composition and performance
The guru's $4.22 billion equity portfolio, which 13F filings show was composed of 58 stocks as of the end of the second quarter, is most heavily invested in the health care, energy and utilities sectors.
Other health care stocks he held as of June 30 were Danaher Corp. (DHR, Financial), UnitedHealth Group Inc. (UNH, Financial), Ventyx Biosciences Inc. (VTYX, Financial) and Sema4 Holdings Corp. (SMFR, Financial).
Third Point posted a return of 22.9% for 2021, underperforming the S&P 500’s 28.7% return.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
