Investors seeking stocks to short may want to look closely at the companies in health care information technology. More than 60% of the companies in the industry are overvalued, according to a report from KPMG and Leavitt Partners.
Although the report didn’t cite companies, maybe one of candidates trading higher than warranted is Cerner Corp. (CERN, Financial). Despite being an industry giant, the company has to be a disappointment to shareholders. It traded near it 52-week low of just more than $49 as recently as mid-December, recovering somewhat since then. Regardless, it is still well off its 52-week high of $67.57, which it reached in mid-July.
One investment group seems to have faith in Kansas City, Missouri-based Cerner. BlackRock Inc., one of the largest asset managers in the U.S., has upped its stake in the company from 4.58% to 6.7%, according to an article in the Kansas City Business Journal.
Both the investment group and Cerner have to be pleased the company recently pushed aside its biggest competitors, Epic Systems and Leidos Holdings (LDOS, Financial), to capture a large contract from the U.S Department of Veterans Affairs. It’s not known how much the pact is worth, but it is likely substantial given the agency's 2015 deal with Epic and Leidos was worth nearly $625 million.
That government deal pales in comparison to the contract awarded to Cerner in May 2018. That one is worth $10 billion over 10 years, reported the Business Journal. And it’s likely to be more because—surprise—the government underbudgeted some elements of the arrangement. Cerner’s health record system will replace the VA’s 40-year-old model.
The VA contracts were attributed in great part for the robust fourth-quarter results Cerner reported on Feb. 5. Bookings were the second highest in company history. Revenue for the quarter jumped 4% to more than $1.3 billion. It was also up 4% for the year. Shareholders will get a bonus as the company plans to pay its first dividend of 15 cents per share, with the first payment planned for December. So maybe Cerner is among the third of the industry players the KMPG report said are considered fairly priced, or even in the 4% seen as undervalued.
The outlook for the health care information tech industry certainly looks rosy. There is an exponential increase in the pace and scale with which digital health care innovations are emerging, according to consulting firm Deloitte. The market is projected to reach more than $285 billion by 2021, according to a report by Markets and Markets. It has grown at a compound annual rate of nearly 16% since 2016. Among the reasons cited are the need to reign in health care costs and to improve the quality of care and clinical outcomes.
Some of the other big industry players are Allscripts (MDRX, Financial), Cognizant Technologies (CTSH, Financial) and McKesson (MCK, Financial). Maybe the place to go long is in one of the smaller companies. An interesting one is iRhythm Technologies (IRTC, Financial).
The San Francisco-based digital health care company provides ambulatory electrocardiogram monitoring products for patients at risk for arrhythmias. Although the company isn’t yet profitable, it has a more than $2 billion market cap and trades at $84 a share, up more than 50% from a year ago.
Omnicell (OMCL, Financial) has also rewarded shareholders nicely. Based in Silicon Valley, the company’s shares have gained 37% in the past 52 weeks. Omnicell provides automation and business analytics software solutions for medication and supply management in health care worldwide.
Long or short? Investors should research the industry thoroughly to determine where they want to place their chips.
Disclosure: The author has no positions in any of the stocks mentioned in this article.
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