September traditionally signals back-to-school, but has the month signaled something else for investors? To follow up a historic rally, September has seen steep losses across the board, with the S&P 500 slipping 5% since the month kicked off. This decline has led some to wonder, is this just a correction, or is it the beginning of another bear market?
Hedge fund manager David Tepper has said the market is “maybe the second most overvalued” he has ever witnessed, only behind the 1999 dot-com bubble. “The market’s pretty high and the Fed’s put a lot of money in here … the market is by anybody’s standard pretty full,” he commented. That said, while Tepper is taking a “relatively conservative” stance, he is still watching out for opportunities.
Based on Tepper’s storied career, it makes sense why the Street is giving serious thought to his commentary. The legend, who began as a credit and securities analyst with Equibank, co-founded hedge fund Appaloosa Management in 1993. Appaloosa wowed clients early on as the fund, which started with $57 million in capital, delivered 57% returns on its assets and grew to $300 million in 1994, $450 million in 1995 and $800 million in 1996. If $1 million had been invested at the time of inception, it would have grown into $181 million. To this end, Appaloosa now manages about $13 billion.
Bearing this in mind, we decided to look at Appaloosa’s recent activity for inspiration. Running two stocks the fund picked up during Q2 through TipRanks’ database, we found out that the analyst community is also on board, as each sports a “Strong Buy” consensus rating.
Boston Scientific Corporation (BSX)
First up we have Boston Scientific, which develops and manufactures interventional medical devices. Following its recent estimate-beating performance, some believe this name’s long-term growth narrative is strong.
During Q2, Appaloosa pulled the trigger on 835,000 shares, increasing its holding by a whopping 727%. With the fund’s total BSX position now standing at 950,000 shares, its value comes in at $38,275,000.
Five-star analyst Matt O’Brien, of Piper Sandler, sides with the bulls. Citing the company’s Q2 earnings release, the analyst tells clients he is confident in the recovery outlook.
Turning to the details of the print, sales landed at $2 billion. Although this figure reflects a 29% year-over-year decline, it surpassed both O’Brien’s and the Street’s estimates. Going forward, BSX still believes Q3 total sales will be down, but not to the same degree as Q2, and Q4 organic revenue is expected to increase year-over-year.
To this end, O’Brien has several takeaways. “First, as it relates to the elective procedure recovery, Boston was pleased with the sequential improvements delivered throughout the quarter (and even into July). Boston is well positioned as a result of the more emergent nature of their procedures (most procedures can only be deferred for weeks rather than months) and the ability to complete the majority in an outpatient setting,” he explained.
On top of this, O’Brien sees BSX’s pipeline as a key point of strength. The company is not only set to launch new products in 2H20, but specific products “are gaining momentum amongst the medical community.”
The analyst added, “In addition, Boston remains committed to investing in the infrastructure and digital capabilities that support these new product rollouts (which we believe will help bolster training and the willingness of clinicians to adopt the product).”
The final piece of the puzzle? O’Brien highlights BSX’s strong capital position. “In our opinion, the company has struck the right balance in terms of managing their capital structure, improving liquidity to help manage through COVID-19, and ensuring that the company can both re-invest and execute on tuck in M&A. With COVID-19 impacting almost every sector imaginable, Boston remains assured in its ability to achieve its longer-term goals of 6% to 9% top-line growth with the ability to drive operating margin improvement (under a more normalized environment),” he noted.
It should come as no surprise, then, that O’Brien stayed with the bulls. He kept an Overweight rating and $50 price target on the stock, implying 24% upside potential. (To watch O’Brien’s track record, click here)
All in all, other analysts echo O’Brien’s sentiment. 13 Buys and 3 Holds add up to a Strong Buy consensus rating. With an average price target of $46.07, the upside potential comes in at 14%. (See Boston Scientific stock analysis on TipRanks)
HCA Healthcare Inc. (HCA)
HCA Healthcare counts itself as one of the largest integrated healthcare delivery systems in the U.S., with its scale and infrastructure making it a leader in the space. Given its solid showing against the backdrop of the pandemic, this stock has earned quite a bit of praise.
Among HCA’s fans is Tepper. 765,000 shares were bought up by Appaloosa in Q2, with the total position now landing at 1,050,000 shares. After this 269% boost, the position is valued at $140,700,000.
Writing for RBC, five-star analyst Frank Morgan told clients, “HCA is again demonstrating why it should be a core holding in the healthcare space, delivering a strong upside vs. our expectations (which were well above consensus) despite the significant challenges related to the COVID-19 outbreak… driven by a better-than-expected month-to-month volume recovery, strong patient acuity and payor mix, and impressive cost controls.”
Looking at the volume improvement, SS admits for June were 1%, an impressive rebound from -12% in May and April’s -27%. This improvement was driven by the reopening of HCA’s markets and the execution of reboot strategies. The same trend was also witnessed in ER visits and surgical procedures. “Management estimates ~40-50% of the cases that were deferred during the shutdown period have been recaptured (either performed or scheduled), and is hopeful it can recapture the remainder,” Morgan noted.
On top of this, HCA’s cost cutting initiatives demonstrate its flexibility, in Morgan’s opinion. HCA reported an 11% year-over-year reduction in SWB, supplies and other opex – or a $1.1 billion reduction versus the $1.5 billion drop in revenues, with these cost reductions maintained even as volumes began to improve.
What else is noteworthy for Morgan? “With over 33,000 COVID-19 inpatients having come through its doors, HCA has developed increasing capabilities throughout the pandemic. We believe the company is well prepared for a resurgence,” he stated.
Summing it all up, Morgan commented, “HCA’s better-than-expected performance amid the pandemic demonstrates an impressive ability to flex the model in response to changes in the operating environment. Results also confirm that the underlying demand in its markets remains strong, despite the likelihood for continued ebb and flow in patient census as reopenings progress and adjust to flare-ups.”
All of this prompted Morgan to leave his bullish call and $168 price target unchanged. This target conveys Morgan’s confidence in HCA’s ability to climb 25% higher in the next year. (To watch Morgan’s track record, click here)
What does the rest of the Street have to say? 12 Buy ratings and 3 Holds have been issued in the last three months. So, the consensus rating is a Strong Buy. In addition, the $144.47 average price target suggests 8% upside potential. (See HCA Healthcare stock analysis on TipRanks)
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.