Acadia Healthcare Co Inc

During the quarter, we had nice gains in Acadia Healthcare, which we attribute mostly to the market lifting the stocks rather than to specific company developments. However, the overall performance indicates a positive sentiment towards Acadia Healthcare, suggesting that it is well-positioned in the market. The company continues to be a significant holding in our portfolio, reflecting our confidence in its growth potential within the health care sector.

Acadia Healthcare has been our largest contributor to our 2026 performance thus far, driven by the return of proven CEO Debra Osteen, who is executing a turnaround of a fundamentally strong asset base. Osteen's leadership is expected to stabilize operations and improve free cash flow significantly, pivoting from a reported FCF deficit of $424 million in 2025 to a surplus of approximately $140 million in 2026. The behavioral health industry is experiencing a significant supply-demand imbalance, with a massive unmet need for services, positioning Acadia for growth. We believe Acadia could generate $4/share in EPS in the next 3-4 years, trading at 12-20x earnings, which would make it a $48-$80 stock compared to our average cost of around $14/share.

Acadia Healthcare (ACHC) is the leading pure-play behavioral healthcare clinic operator in the U.S. After facing significant challenges, including a New York Times investigation and management issues, we believe the company's asset quality remains strong. Following a leadership change, with the return of a well-regarded former CEO, we see potential for recovery. Our average entry price is $16.24 per share, and we believe that if ACHC achieves stabilized occupancy, it could earn over $3 per share, indicating substantial upside from current levels.