Dealmaker’s Diary: This Healthcare Stock Comes With a Warning

Alpesh Patel|February 1, 2024

Editor’s Note: Welcome to the Dealmaker’s Diary! Each week, hedge fund CEO and trading champion Alpesh Patel will give you an inside look at how he analyzes stocks with his proprietary – and award-winning – Growth-Value-Income (GVI) system. Plus… he’ll share the secrets to his decades of success as an investor, entrepreneur and Dealmaker to royalty.

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It’s smart to invest in the healthcare sector.

The industry is stable… benefits from favorable demographic trends… and is often at the forefront of innovation.

Of course… the trick is finding the right healthcare companies to invest in.

That’s why I want to share this stock that popped up on my GVI system’s radar with you.

The company operates in a critically important part of the healthcare sector.

Earnings and revenue are growing… and the stock looks ready to break out.

However… there’s a warning with this one. And it has to do with its valuation.

Get all the details on the company – including the ticker – in my latest video.

Click on the image below to watch it.

And if you have a stock you’d like me to run through my GVI system, send the ticker to mailbag@manwardpress.com.

Transcript

Hi friends, and welcome to another exciting Stock of the Week.

I say that all the time, but I’m so excited about the markets. My wife overheard me talking about the stock market to someone, and she goes, “How can you be that excited?”

I don’t know. I just love this stuff.

What’s the Stock of the Week? Acadia Healthcare (ACHC). Now, I’ve not picked a healthcare one for a while, I don’t think. They are based out of Tennessee, in a place called Franklin. And they were established in 2005, so they’ve been around a while. The company is listed on the Nasdaq, and we know how well the Nasdaq did last year.

However, their work is very serious. Their healthcare behavioral treatment facilities help children, adolescents, adults and seniors who are suffering from mental health concerns – and we know those have been on the increase – or drug and alcohol addiction. So it’s very important work that they’re doing.

The acute inpatient psychiatric facilities and specialty treatment facilities contribute the vast majority of their revenues in the United States. Now, this is where my interest came in: In the United Kingdom, the majority of Acadia’s revenue comes from its healthcare facilities, and virtually all of the payment received is from the National Health Service. So they’ve got a base here in the U.K. as well.

Acadia is forecast to grow earnings and revenues. So that’s good news, and the numbers look good.

Let’s get into some of those numbers.

Now, on my Growth-Value-Income rating system – which, remember, is my proprietary algorithm, which looks at the valuation of a company, weighs that more importantly than revenue growth, which it weighs more importantly than dividend yields – it scores an 8.

The forecast P/E ratio is 25.9, which isn’t cheap. In other words, its current share price is at a multiple of 25. You are paying $25, basically, for every expected future dollar in profit. So it certainly is not cheap.

And its Sortino is good – in other words, the average return compared to the downside risk of missing it. It’s 0.7.

And as you’ll know, the CROCI, or cash return on capital invested – which I consider very important, and there’s explanation why around this video – is a bit low. It’s not in the top quartile.

Remember, in GVI Investor, I go through all of this in an immense amount of detail, explaining all of these things and why all these boxes need to be ticked: value, growth, income, cash flow and the like. But it’s good enough. It’s good enough for me. It’s not negative cash burn.

The chart… It’s had a bit of a problem trying to break above about $85 for a while now, despite having been only $13 in January… well, around 2020. So maybe it needed a breather for the last couple of years. It’s had that breather now, and I think it might be time for it to move to the upside.

One warning… On a discounted cash flow basis – now, this shows you that discounted cash flows can be crazy… you can play with these numbers – it’s forecast to be somewhat overvalued. So just be careful with discounted cash flows. They can give you some crazy results sometimes, as they do with this. And so I’m sort of putting that to one side.

But yes, profits are forecast to grow almost 50%. So there’s some strong growth going on there… which you could say, “Well, actually, that’s a reflection of just what’s going on in the world.” But it’s also a reflection of the fact that the company’s expanding and growing as well.

So that’s the Stock of the Week. Keep well. I wish you all well. Since it’s a healthcare company, I certainly do wish you all good health. Thank you.

View Alpesh’s archive here.

Alpesh Patel Alpesh Patel is an award-winning hedge fund and private equity fund manager, international bestselling author, entrepreneur, and Dealmaker. He is the founder and CEO of Praefinium Partners and a Financial Times top FTSE 100 forecaster. He has penned more than 200 columns for the Financial Times and has written 18 book on investing, which have been translated into six languages. Those books include The Mind of a Trader and 7 Simple Strategies of Highly Effective Traders. (One of his books was even a top five bestseller on Amazon – right behind Harry Potter.) A frequent guest on financial news shows, Alpesh has also hosted his own shows on Bloomberg TV, CNBC and Sky TV. He’s a sought-after speaker, and he’s presented at more than 500 conferences around the globe, including for Rothschild & Co., Goldman Sachs, Barclays and the London Business School. A University of Oxford alumnus and former Visiting Fellow in Business, Alpesh interned for U.S. Congressman Eliot Engel and was appointed to a U.K. advisory position by former Prime Minister Tony Blair. As a senior-most Dealmaker in the U.K.’s Department for International Trade, he is part of a team that has helped deliver $1 billion worth of investments to the U.K. since 2005. He’s also a former Council Member of the 100-year-old Chatham House, the foreign affairs think tank. For his services to the U.K. economy, Alpesh received the distinction of Officer of the Order of the British Empire (OBE) from Queen Elizabeth in 2020. As a recognized authority on fintech, online trading and venture capital, his past and current client list includes American Express, Merrill Lynch HSBC, Charles Schwab, Goldman Sachs, Barclays, NYSE Life… and more. Alpesh is also known for his philanthropic efforts. He co-founded the U.K. chapter of the largest entrepreneur mentorship organization in the world (TIE.org) and is co-chair of the Loomba Foundation, which supports widows and orphans. Investor Magazine calls him “the U.K.’s most respected stock picker.” The Independent says he is “an expert in his field.” And Channel 4 TV called him the “U.K.’s best-known online trader.” Alpesh writes an elite weekly column for Total Wealth and runs the award-winning research service GVI Investor… through which he brings his hedge fund secrets to everyday investors.