Today’s tease for our consideration comes from Charles Mizrahi, who in recent years has been putting out Alpha Investor, one of the entry level (currently $79/yr, one year refund period) newsletters from Banyan Hill — that letter tends toward relatively stable investments, from what I can tell, and focuses less on the mega growth stuff that everyone’s most excited about recently.
Those “entry level” newsletters tend to be pretty popular, and they’re often better-reviewed than the pricier upgrade letters — they usually recommend larger companies, without as much trading, and, from the publisher’s perspective, they are the vacuum that sucks in the largest number of possible prospects for their “upgrade” newsletters that form the real profit center of most publishers. So if you do sign up for a paid newsletter from any of the big publishers, just do keep in mind that you will have instantly become the most coveted person in the world to financial marketers — nothing gets them excited like the little flag that comes up when they find a new person who is willing to pay for information. It almost doesn’t matter whether you’re willing to pay $30 or $300, the fact that you’re willing to open your wallet at all makes you a huge prospect for the $1,000 letter, or the $5,000 “lifetime” package, and you will get those upgrade offers hot and heavy for at least the next couple of years.
But where was I? Oh, yes, finding a stock for you. This particular pitch about “IoMT” carries a January 2021 date, though this is the first time I’ve noticed the ad, and Mizrahi sums up his “tease” on the order from here:
“I’ve identified one company as the undisputed leader of the IoMT revolution. It is vital to managing epidemics … improving quality of life for patients … treating chronic diseases … and avoiding preventable deaths. That’s why the biggest hospitals and health networks in the country have inked deals with the company. Better still, even if the economy slows down, the company will still make a boatload of money. But you need to act NOW … before the IoMT story makes the nightly news.”
“Act Now” is always more about getting you to pull out your credit card than it is about the urgency of a stock that is on the verge of a big move, no surprise there — the salesman’s biggest obstacle is indifference… if you say, “meh, I’ll think it over” they know their chances of a sale fall, so every pitch has an embedded false urgency to it. Any newsletter promo without a sense of urgency or a hinted-at catalyst or deadline fails).
So what’s “IoMT?” That’s the “Internet of Medical Things” — basically, this pitch is built on the idea that wearables and technology and patient monitoring are creating a deluge of data, and that data will lead to better health outcomes… and make us all rich.
Here’s how Mizrahi describes his way of picking stock ideas:
“I have a three-step approach for finding these stocks.
- The company has to be in an industry with a tailwind. Such as companies in 5G … AI … cloud computing … and now, IoMT.
- I look for companies that are run by a rock-star CEO. Because, if a CEO has helped the company’s share prices to double, well … odds are, it will happen again.
- I want to make sure the stock is trading at a bargain price.”
I generally hate the veneration of the “rock star” CEO, though I confess to having come across several over the years who really strike me as powerful leaders — so I guess that’s a little bit of a clue… but what else do we learn about this secret stock?
“Today, you have the chance to own the one company at the heart of the IoMT mega trend — at a price you likely won’t see again…
… the details of the Missouri-based company that is leading the charge of this incredible mega trend.”
Believe it or not, that might be our best clue — not a lot of big companies out of Missouri. What else?
He talks up a bunch of examples of innovations, from helping to screen for skin cancer or stroke by using selfies to the new handheld ultrasound tools that might make medical imaging cheaper and more portable, but what he’s actually talking about as an investment sounds like it’s probably a larger company that works a little more “behind the scenes” in healthcare technology.
More from the pitch…
“According to Grandview Research, IoMT is on course to soar to $534 billion over the next five years … a 2,125% increase!
“And here’s the best part…
“I’ve uncovered the one company at the center of it all.”
And some hints to tie in the sexier ideas to this “IoMT” notion, like robotic surgery and telehealth…
“IoMT is on course to make traditional devices obsolete.
“Folks, this mega trend could be the single biggest medical advance in history.
“And at the center of it all is a company that connects virtually everything.
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“Electronic health records.
“All of them.
“Seeing the ‘big picture’ helps doctors catch the early signs of chronic conditions before they cause permanent harm or death.”
And some reasons for temptation….
“Teladoc Health is already up 135% since the epidemic began…
“NextGen Healthcare is up 208%…
“And telehealth company Livongo was up 546% since the lockdown began.
“These are impressive gains, for sure.
“But I believe my favorite IoMT stock will do even better…
“The company has helped healthcare facilities expand telehealth more than 100-fold in some cases.”
But this is really, we’re told sort of a “big data” story…
“More importantly, it produces one of the most valuable resources on Earth:
“You see, the amount of ‘Big Data’ is on course to reach 163 zettabytes … driven in large part by the Internet of Medical Things….
“This ocean of data is pure gold….
“The company I’m recommending today is vital to managing epidemics…
“Improving quality of life…
“Treating chronic disease…
“And avoiding preventable deaths.
“It will also replace a one-size-fits-all approach to more personalized treatments.
“Data from pre-op records can improve surgical outcomes. It can also help reduce a patient’s length of hospital stay by 21%.”
And a few more hints about this stock:
“… the company I’ve had my eye on for a few years is not a startup.
“In fact, go into any healthcare facility today. Odds are you’ll find the company’s system linking patient health records to pretty much everything else.
“These systems don’t come cheap.
“So once a hospital or clinic buys in, they’re unlikely to walk away from that investment.
“That’s why nearly 90% of this company’s sales come from recurring and highly visible revenue.”
OK, so “recurring revenue” is music to our ears — nothing quite soothes the investor’s soul like knowing the sales will hit the books again next year. Anything else?
Um, not really.
Now, that’s not a whole lot of clues… but thankfully, the workmen helping us with our kitchen renovation moved some of their junk around in the garage, so I was able to get to the Thinkolator and take the tarps off — and even after a cold snap this week, she purred right to life and got a pretty quick set of possible answers. A quick check against the short list of companies that are actually headquartered in Missouri (there are only 25 that are valued at over a billion dollars), and we can confirm the Thinkolator’s “most likely” answer — this is almost certainly the healthcare IT leader Cerner (CERN).
Here’s how Cerner describes itself:
“For 40 years, Cerner has connected people and systems around the world to improve health care outcomes. As we enter the next era of health care, our commitment to seeking innovation remains stronger than ever. We understand care profoundly affects people’s everyday lives; that’s why we constantly work to help create a seamless and connected world where everyone thrives. We help shape the future of health care by delivering value to our clients through data-driven insights and intelligent solutions.”
Cerner has largely been known, at least from the perspective of recent investors, as an “electronic health records” company as they’ve been a big leader in the push to standardize and modernize data collection in healthcare, and that’s still a stubbornly long-lasting project. This year they finally connected a lot of the Veterans Administration healthcare facilities and have gone live at 22 Department of Defense facilities, and it’s somewhat revolutionary that the DoD and the VA are now both using the same electronic health records. In 2021. Sometimes change and modernization is slow.
Cerner is indeed trying to build a “category-defining data business” in healthcare, and they start out with a huge advantage thanks to their leading market share, with about a third of US hospitals as Cerner customers. They do have an ambitious plan to grow their data-based business, both to support hospitals and health systems and to help with things like drug development, but they’re also an established company with a decent dividend and relatively slow top-line growth (and last year, thanks to COVID, an actual reduction of top-line revenues… a common issue for almost everyone in healthcare). They see themselves continuing to generate over a billion dollars in free cash flow per year (this is roughly a $20 billion company), and they’ve also been spending some of that cash flow, with both substantial buybacks (paused for COVID, but now resumed) and the acquisition of Kantar Health, which should close in the next few months (that’s a data and analytics company, with a particular focus on oncology and drug development).
It’s not a particularly cheap company, not at about ~20X free cash flow and earnings, but it fits nicely into the “growth at a reasonable price” slot that makes sense to me — they have a tailwind when it comes to health care spending, thanks to both new technology adoption and an aging population, they aren’t particularly tied to drug prices or other controversial stuff in healthcare that gets a lot of regulatory attention, and they’re established, profitable and growing. The likelihood is that they’ll grow earnings at a 10-15% a year pace for at least the next several years, so paying 22X forward earnings is pretty reasonable if you think they company is on a good track (a nice rule of thumb for “growth at a reasonable price” is to get a Price/Earnings/Growth (PEG) ratio below 2.0 — so 11% growth would make paying 22x earnings look pretty palatable)… or might even do better than that, as Mizrahi seems to believe, with the more rapid adoption of new healthcare technologies.
Analysts are not terribly excited, however — following the disappointing earnings in February (Conference Call transcript here) and the somewhat tepid growth forecast from the company, CERN got several downgrades to “hold” or “neutral” as the analysts called out a lack of real catalysts for big growth, though they did note that the company has started to allocate capital more to higher-growth markets — including that Kantar acquisition, announced in December but not closed yet.
So to sweeten the juice a little for this one, that drop in the shares after the February earnings report means the stock is a little lower priced than it was when Mizrahi apparently put this tease together in January. The shares fell pretty sharply from the low $80s to about $70 in February, and at $72 they’re now right about at the average price where they traded for most of 2020. So if you happen to find this one appealing, well, at least you haven’t missed anything yet.
And there has been some insider buying, which tends to be a good sign (just from one person, CFO Merk Erceg has been buying shares almost every day since he was hired about a month ago, but I’ll take it). I wouldn’t expect anything sexy like 2,000% growth, or even a pop right back up to $80 next month, but my first impression is that it seems reasonably well positioned for patient investors. We can add a second entry to that list of mild positive indicators, too, because Cerner just became a dividend growth company a few months ago — they initiated a dividend in mid-2019, and raised that dividend for the first time in December. It was a good raise, too, of 22%, though the dividend remains small — currently a yield of 1.2% (at $72), and with a pretty reasonable payout ratio of 30-40% of earnings.
So yes, I’m inclined to like Cerner, though I’ve never owned it, and on first look-through they seem well-positioned to get growth restarted at least a little bit, even if it might move slowly, through their focus on building up their Data-as-a-Service business. It’s not a deep value, even if sometimes a PE of 20 feels like deep value these days, and the use of debt to pay for buybacks does indicate that they know their growth has slowed a bit and they need to find a way to appeal to investors, and I’m not crazy about that kind of “financial engineering”… but they do have a strong customer base to provide some meaningful stability, and real cash earnings even if they don’t have particularly sexy top-line revenue growth, and they are trading at a relatively low valuation compared to their historical multiples… so if they can get growth perked up even just a little bit, then at these prices CERN could be a solid opportunity for the patient investor who’s looking for a “compounding” idea. The last time I looked at Cerner was more than five years ago, and back then it felt like investors were overpaying for growth… that no longer seems to be the case, the earnings and the revenues have caught up with the share price.
The idea of turning healthcare data into actionable intelligence and turning that into a growth business was part of my rationale for investing in Premier (PINC) a couple years ago as well, and that didn’t work out very well because of softness in their core business (I no longer own PINC), but I did believe and still believe that there is a lot of potential value in health data, and in data-driven support for healthcare decisions in general… and Cerner is certainly a leader in health data. Whether or not they’ll maintain their leadership in healthcare IT, I don’t know, but my interpretation is that they’re doing reasonably well so far.
I’ll let the experts deal with biotechs, clinical trial data and that kind of stuff, the real speculative ideas in healthcare, but I do generally find the healthcare business attractive and I am drawn to the general idea of “growth at a reasonable price” right now, so I’ll throw Cerner onto the watchlist and see how I feel about it after a bit more study. I’m not worried about missing a 2,000% gain if I think it over for a while, Cerner really isn’t that kind of stock, so I won’t rush it. If you’ve got thoughts or feelings to share about Cerner, or about healthcare technology in general, feel free to shout ’em out with a comment below. Thanks for reading!
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Disclosure: Of the stocks mentioned above, I own shares of Teladoc. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.