“Don't expect to play well in packed gyms if you aren't willing to put the work in when the same gym is completely empty.”
– Anonymous
The twenty-four hours leading up to everything felt like a blur. Maybe it was the box of sugar free Red Bulls I consumed while preparing the slides or the seemingly hundreds of miles I traversed inside my apartment while practicing the bullets of my pitch over and over. Either way, it was time, and I was now waiting in a Zoom lobby with five phenomenal sector heads who helped build Hedgeye into the firm it is today.
It was in those eighteen minutes before I spoke that I couldn’t help but reflect on how much had changed since I first walked in the door of the Hedgeye office nearly a year earlier. I snapped back to reality when Keith said, “That was Andrew Freedman. Now first time on The Pitch here’s Will McMahon…”
Just like that I was talking.
While my presentation on The Pitch went smoothly and Natera (NTRA) outperformed in the following months, the focus of my Early Look today has nothing to do with genetic testing or pitching stocks. Rather, I chose to reflect on what I learned from that opportunity which helped me prepare for all of those that came after.
For me, the most rewarding aspect of appearing live on HedgeyeTV was the benefit of witnessing in real-time the hard work that I put in when no one was looking and how that was slowly transforming me into a better analyst. Every early morning hour reading articles, every team meeting challenging ideas and re-working theses, and every late-night finishing models had given someone who struggled in chemistry in high school, the ability to efficiently describe a tumor-informed assay for cancer recurrence. My proverbial “free throws in the gym” moved the needle and became integral to my process.
As the famed high school basketball coach Tim Notke once said, “Hard work beats talent when talent doesn't work hard.”
And I know that #HedgeyeNation works just as hard as we do for you. We are all a team of grinders, filled with grit and determination; a group of individuals who don’t quit and work until the job is done. All of us have faced adversity as a result of this global pandemic - lost loved ones, job scarcity, and a permeating sense of public distrust fuels uncertainty of what the future will bring.
Regardless, we managed to live through its many waves and hopefully strived to be a little better during it. Aside from the additional stresses and hardships that the pandemic created, it also created several new opportunities for us to change how we work, communicate, and live. It is how we grow from this crisis that defines us, and the only way through these uncertain times is forward.
As 2021 comes to a close, rather than focus on the things that didn’t happen or the opportunities we may have missed, let’s look forward to getting better every day. As Aldous Huxley wrote, “There is only one corner of the universe you can be certain of improving, and that's your own self.”
Time to hit the gym for some analytical ‘free throws’…
Back to the Healthcare Grind…
Okay, now back to the idea generation grind within the health care sector. Among the many hardships which COVID has created, the effects of fatigue, burnout, and morale injury have taken a toll on many Americans with an even larger burden being placed on health care workers.
Recent survey results show that 42% of US adults now report feelings of anxiety or depression following the onset of COVID-19 relative to 11% reporting these symptoms prior. Incremental demand for mental health management services paired with the shortage in qualified workers, has created a massive opportunity on both the long and short side.
From the work we did on the providers of mental health management, we developed and presented a combination mental health black book last week detailing our long thesis for new best idea long, LFST, and our short thesis for new best idea short, ACHC.
Best Idea Long: LifeStance (LFST)
LifeStance is a hybrid outpatient mental health company that came public in 2020. We've been stalking this one since the 2Q21 earnings call. LFST is one of the largest providers in a highly fragmented industry, and their goal is to provide in-network psychotherapy that keeps out of pocket expenses low for patients. The growth strategy is to expand the network of nearly 5,000 therapists through organic hiring and both de novo expansion and acquisitions. The market for mental health services is severely supply constrained as patient demand growth, which was strong before the pandemic, has done nothing but increase. The result has been a very difficult staffing environment across many industries, especially Health Care. LFST has acknowledged the difficulty in hiring and reduced guidance as a direct result of the tight labor market (see 3Q21 results), resulting in a 64% drop in the stock price from a peak of $29 to the current price of $9.55.
We expect LFST to successfully continue its expansion, and without significantly exceeding consensus, we expect the multiple to result in meaningful upside over the next year. We're expecting modest upside to therapist growth in 2022, but our tracker will keep us on top of location level trends. On our 2022 revenue estimate of $912M we think the stock can re-rate to 9.0-10.0X EV/Sales and trade to $19-$20 versus the current price of $9.55, or 100%+ upside from here.
Best Idea Short: Acadia Healthcare (ACHC)
Since the stock reached its all-time high in April, ACHC has seen a significant re-rating in both its EV/Sales and EV/ EBITDA multiples, now trading at 2.88x NTM Sales and 12.35x NTM EBITDA. From here, we believe the price will be more highly correlated to EBITDA based on management’s ability to succeed in an environment primed for top-line growth but shrouded in supply headwinds.
ACHC relies more heavily on the ability for a legacy provider to successfully adapt to the new needs of patients and providers over a short time horizon burdened by their existing infrastructure. For this reason, our thesis is centered on the ability to ramp staffing and beds to meet incremental (higher acuity) demand, stave off new entrants, and maintain cost controls. The way we see it, ACHC is stuck between the rock and [very] hard place we outlined last week. It has a choice to either expand capacity through capex and acquisitions and pay up to staff the beds, or slow expansion, slow capacity utilization, and hunker down with the staff they have. Given the data on wage inflation for workers, ACHC will have to make a decision to either continue delaying the projects they have in the pipeline in favor of maintaining better pricing metrics but sacrificing on top-line growth in the near term. Either that, or management can de-prioritize typical hiring metrics in order to attract the necessary nurses, medical technicians, and licensed clinical social workers from newly formed, hybrid employers.
We believe the $85MM reduction (at the midpoint) in FY capex guidance given on the 3Q21 Earnings Call in October is likely the first indication of the dilemma ACHC is facing. Utilizing the midpoint of its pre-COVID historical trading range, we expect 20%-35% downside from the current price with potential for further downside in the out years following poor performance in the near-term.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.39-1.52% (neutral)
UST 2yr Yield 0.59-0.72% (bullish)
SPX 4 (bullish)
NASDAQ 14,920-15,792 (bullish)
RUT 2131-2265 (neutral)
Tech (XLK) 164.99-175.38 (bullish)
Consumer Discretionary (XLY) 191-207 (bullish)
Housing (ITB) 76.23-83.08 (bullish)
REITS (XLRE) 48.60-50.61 (bullish)
Shanghai Comp 3 (bullish)
Nikkei 27,917-29,214 (neutral)
Oil (WTI) 68.18-73.92 (bearish)
Nat Gas 3.50-3.98 (bearish)
Gold 1 (bullish)
Here’s to staying vigilant and eager,
Will McMahon
Health Care Analyst
