August Stock Pick: Everybody Is Watching The Wrong Number
The whole debate is about one line in the accounts but the money gets decided on a different one.
Some of you will recall that last December I took my family to Chile, and we only made it back to Toronto in April. Besides avoiding the Canadian winter, we had a long list of things to sort out down there. One of them was my mom’s back surgery.
You might ask why she didn’t have the surgery in Canada. I am covered as a Canadian citizen, my mom isn’t, and there is no private hospital system here to fall back on. So for years I have been paying for a private health plan for her in Chile for exactly this kind of situation, and this was her third back surgery. On top of the private plan I carry a complementary policy for her as well. In a nutshell, on a $55,000 surgery at Chilean prices, I paid the $1,902 deductible and nothing else.
Why am I talking about this and how is it relevant to the August stock pick?
Between Chile, Canada and the years I spent in the US, I have dealt with health care systems that run from public to private to barely there. Health care touches all of us at some point in our lives, so why not our portfolios!
This company reported six weeks ago, beat on every headline metric, raised its full year profit guidance by a quarter of a billion dollars, and the shares fell 12% in a day. Mr. Market looked at the raise, looked at what management left unchanged, did the subtraction, and hated the answer. The stock price fully recovered and is actually higher than pre-earnings.
The argument the sell-side and other investors are having about this company is an argument about one line. Roughly a fifth of every premium dollar this business collects goes somewhere almost nobody writing about it has modelled. It is not claims and it is not overheads. And the perverse part is that the better this company executes its growth strategy, the bigger that payment gets.
That is the idea. Below the paywall I will explain the industry from scratch so you can follow this even if you have never looked at the space, walk through what the company is and how it got here, show you the line nobody models, ask the capital question nobody asks, and then take you through my model, the bear case at its strongest, and where I come out.
