“Winning is not a sometime thing; it's an all the time thing. You don't win once in a while; you don't do things right once in a while; you do them right all of the time. Winning is a habit. Unfortunately, so is losing.”
- Vince Lombardi
Speech Night was a big deal at my middle school. Students would recite a famous speech by anyone they chose, dead or alive, poetry or prose. The only stipulation being that you admired the person who gave it.
Growing up in southeastern Louisiana, football was everything. We watched it. We played it. We talked about it constantly. These conversations that often started with players usually transitioned to coaches. Shula had the perfect season. Parcells could turn any franchise around. But my favorite coach was the one none of us had ever seen on live TV, Vince Lombardi.
Lombardi was notorious for winning the first two Super Bowls and would eventually have the trophy named after him. Despite his success, I would argue that it was not his accolades that he is remembered for, but the process which he employed to achieve success. Something that we discuss often at Hedgeye.
Lombardi’s approach to winning required painstaking discipline, meticulous preparation, selfless collaboration, and flawless execution. These ideals not only comprised many of the quotes and speeches Lombardi gave, but were the very foundation of his championship offenses.
The 'Lombardi Sweep' as it came to be known was a play popularized by the Hall of Fame coach that formed the foundation on which the rest of his teams’ offensive game plans were built. Lombardi understood that before his team could do anything else, they had to master the basics.
The secret of the play was that it was simple. The play was run by forming a wall which would shield the ball carrier from the defense, creating a clear path. Given that the success of the play was built on forming a cohesive unit, it required each player to execute their responsibility with discipline and efficiency or leave a hole that would result in failure.
Throughout my time at Hedgeye, my favorite Hedgeye-ism is one Keith reiterated on The Call earlier this week, “the humility to recognize that we know nothing, but every day we can work to get closer to knowing something.”
That same concept is what Lombardi’s players realized. They knew nothing about how to win a championship, but by humbling themselves, doing their jobs, and trusting their teammates, they became champions.
As for me, I pulled on a hat and a pair of large round glasses, gave Lombardi’s 'What It Takes to be Number One' speech, and took home a gold medal. Even though I cannot tell you where that gold medal is now, I will always remember the words of my favorite coach.
Back to the Health Care Grind…
When our team meets each week, we review our current ideas in the context of what has changed that week, what we have learned, what is still left to do, and what is coming up next week. Is our thesis still intact? Is the idea a better or worse idea compared to a week ago? While much of the analysis is played out in spreadsheets, it is often the portion of our discussion that focuses on what is happening outside our meeting that has the most meaningful impact on our decision. This is our process.
COVID-19 threatened to put holes in the wall of our process. However, much like Lombardi’s, our approach is grounded on a disciplined methodology which emphasizes efficiency even when a global pandemic is drastically shifting the landscape of our sector. With our process intact, we were able to adapt in real- time to a number of new themes brought about in 2020, most notably that concerning pent- up demand.
Heading into the summer of 2020, realized that the number of doctors’ appointments that our family, friends, and colleagues had rescheduled were being deferred indefinitely. These deferrals kickstarted our interest in the potential effects of lost volume. To begin our deep dive, we found a number of data series that allowed us to measure and map the drop off in volume across the system. We began modeling the potential impact which grew as more time went on.
To support what we could see in the data, we engaged our community of experts to add anecdotes to our data that confirmed clinicians in the field were experiencing in their daily lives what we saw in the data. Soon after, IQVIA published a paper pointing to over one billion missed diagnoses because of deferred visits. The academic research confirmed our hypothesis, so we turned back to the data to determine what it meant and how we could reflect it in our position monitor.
Through trial-and-error, we found that aggregate hours worked is tightly correlated to utilization. This concept can be understood as an increase in aggregate hours worked would likely mean an increase in output should productivity remain stable. Judging from our most recent update, we found that hours worked, and therefore utilization, remained below pre-pandemic and trend levels. While providers believe that volume is “back to trend,” we suspect that is because they cannot see the patients who are continuing to defer care.
While this is a “great story if true,” we recognize that doctors are capacity constrained, exam rooms and hospitals are limited. However, areas such as mental health are experiencing incremental growth YoY showing that utilization can pick up to meet additional demand.
Since that last update on our 2Q21 Health Care Themes Call, demand recovery has been a common theme throughout the first quarter of 2021 health care earning season. It seems at this point that it is less likely that a client disagrees with us on the existence of pent- up demand, but rather the potential and rate at which it will be unlocked. We understand those concerns, but only need the story to be a little true to be right.
Today’s chart of the day below suggests that while the delivery system may be “back to trend” and capacity constrained, we see +4% to a full return to trend, +3% for utilization, and a multiplier from deferred care that could drive medical consumption well into the double digits as the US Medical Economy re-opens. For Health Care, these are big numbers.
We will be keeping an eye on pent- up demand as well as the resulting return to trend + which we believe will result from it. When we benched several of our long ideas earlier in the year, we saw a gap between emerging pent-up demand and decelerating estimate trends in Health Care. According to our MicroQuad outlook, we expect estimate the momentum to begin improving next month, at the same time we should also be seeing evidence medical utilization is taking off.
Per usual, we will discuss our longs and shorts again today at our team meeting. The winners, and the losers, what we learned this week and what is coming up. The mistakes and successes, and what we know and what we do not know. We will continue to execute the process and get better.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.57-1.72% (bullish)
SPX 4065-4262 (bullish)
RUT 2119-2320 (bullish)
NASDAQ 12,951-13,648 (bearish)
Tech (XLK) 130.98-137.74 (bearish)
Energy (XLE) 50.39-54.45 (bullish)
Financials (XLF) 36.04-38.19 (bullish)
Utilities (XLU) 63.87-67.31 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 270 (bearish)
DAX 142 (bullish)
VIX 14.88-26.76 (bearish)
USD 89.80-91.35 (bearish)
EUR/USD 1.201-1.220 (bullish)
Oil (WTI) 63.40-66.56 (bullish)
Nat Gas 2.86-3.03 (bullish)
Gold 1 (bearish)
Copper 4.47-4.85 (bullish)
Silver 26.05-28.01 (bullish)
Have a great day out there,
William McMahon
Health Care analyst
