I like the work of Dan Ferris, I’ve seen him present at a few conferences over the years, and have read plenty of his free commentaries (and teaser ads), and his ideas, while not particularly sexy, are well-researched and interesting.
That doesn’t mean they’re always successful, of course — I’ve written about several stocks he has teased in order to tempt new subscribers to Extreme Value, some of them have been great long-term values and others have been duds (I don’t know what his average return is, of course, since he doesn’t publish it and I’m not a subscriber). I also don’t know which of the past stocks that were weak for a long time might still be in his portfolio — his pitch for Nam Tai Property (NTP) as a “penny real estate” play back in 2014, for example, looked terrible for three years and then perked up and started rising in value over the past six months or so.
And the most aggressive stock teasing that has come out of Ferris’ service over the past five years or so has been for Altius Minerals (ALS.TO, ATUSF), which he has touted many times as an undervalued asset owner and potentially the next great royalty play… it hasn’t worked very well, despite the fact that I agree with him and have held Altius for many years. It was a Ferris teaser that first turned me on to Altius back at $5 or so in February, 2009, when everyone was quite certain that the financial world was coming to an end — and holding from that point forward would have resulted in 72% gains, which sounds OK until you compare it to the 234% gains you would have had from buying an S&P 500 index ETF at that point (my performance has been worse than that, because I’ve bought more along the way, including recently).
So there’s your caveat — I often like Ferris’ reasoning, sometimes I agree with him on stock ideas, but he can certainly be wrong (and sometimes “early,” which is seen as the same thing as “wrong” in our “what’s going to go up in the next six weeks” investment culture).
And most of the time, the hard sell for Ferris’ Extreme Value seems to me to overstate the near-term potential — which is not so uncommon, given that teaser ads always have to have a “hot” deadline and a near-term catalyst to catch your attention (even if, in some ads, the catalyst is only in the ad copywriter’s imagination), but it’s worth noting because Ferris ads typically include the same “get rich quick” frenetic language as most heavily-promoted newsletters, even though, when you look a little deeper, the real pitch is for long-term returns.
This time there is actually a deadline and a potential catalyst, and it is based on something real — a regulatory change in the health care industry. Here’s how the ad gets our attention:
“We’ve waited 7 years for this.
“The Stansberry analyst who recommended three of our all-time best-performing stocks is stepping forward with his newest big opportunity.
“It’s a little-known situation in the markets that could realistically make you 3 to 5 times your money, beginning January 1, 2018.”
OK, so we know that they haven’t been waiting 7 years for a stock pick, or for an idea worth promoting from Ferris — they’ve touted a bunch of his picks in ads since 2010, including Altius, Sprott Resource, MFC Industrial and Panhandle Oil & Gas on the “disappointing” side and Apple, Expeditors International, Brookfield Asset Management and Madison Square Garden on the “pretty good” side.
But the pitch says that Ferris often goes for months without recommending a new stock, and that this is the first time in seven years that Ferris has found a “similar opportunity” to his past “hall of fame” recommendations that gained several hundred percent… though, frankly, they’ve used similar language to pitch most of his ideas — the image Stansberry uses to sell Ferris’ newsletter is of a cantankerous mountain man who lives far from Wall Street and stubbornly researches new ideas and doesn’t care if you agree with him or not.
So what’s the “little-known situation in the markets?” The ad compares it to the impact of Obamacare on health insurers, hospitals and the like (the good impact, naturally, since it brought them more paying patients).
“But here’s something most people don’t know…
“A lesser-known health care law, passed back in 2014, is going to create another huge investment winner, beginning January 1, 2018, in exactly the same way… by driving billions of dollars into a small handful of companies.
“The law is the Protecting Access to Medicare Act (PAMA) of 2014…
“And Section 216 kicks in on the first day of January 2018.
“It’s the kind of thing only Dan Ferris could discover.”
OK… so why does this “Section 216” matter? More from the ad:
“You see, the moment Section 216 kicks in…
“Medicare will legally create a virtual monopoly in one, $53 billion niche of the healthcare market:
“Medical testing labs, where you go to get bloodwork done.
“There are thousands of testing labs in America. Some are small, rural, independently run labs… while others are big national firms. Think the Amazons of the industry…
“The big players have volume on their side. That means they can naturally charge Medicare lower fees per patient.
“But once Section 216 kicks in, Medicare Part B will be forced to slash its budget, up to $670 million in 2018 alone… and $5.4 billion over the next decade.”
Wait, so the testing industry is about to see medicare reimbursements cut… and that’s somehow going to benefit them? We need more info… back to the ad…
“After months of research, Dan discovered that Medicare — through Section 216 — will be specifically slashing its budget for medical testing.
“That means many small, independent labs already struggling to make a profit could eventually shut down — or go bankrupt — once Medicare’s lower fees go into effect…
“And hundreds of millions of dollars of business will go straight into the big-name labs.”
Ah… so this is a market consolidation story… more of the business will go to the big players (which is, of course, the trend in most sectors anyway). I guess the argument must be that the increased market share the big companies will receive because the little companies die, will be enough to make up for the fact that the big companies also will have to cut their prices for Medicare. Or maybe they just aren’t as reliant on Medicare as the little guys.
What else does the ad tell us? Here’s some more…
“Health industry expert Joseph Burns — one of the few experts even talking about Section 216 – reports it as ‘the single most financially disruptive event to hit the industry during the past 25 years.'”
OK, so that ups the ante to get an “expert” agreeing with Ferris. How about some more hints about which of the big testing companies Ferris is actually recommending?
“But there’s one world-dominating company that processes hundreds of thousands of medical tests a day…
“It serves half of the doctors and hospitals in the U.S.…
“Most importantly, it’s one of THE lowest-cost test providers in the industry.
“Again, Medicare will be looking for the best deals after Section 216 kicks in…
“And the company Dan found already provides the lowest rates in the country.
“That’s why, once Section 216 goes into effect, Dan expects you could see a 50% gain beginning or before January 1st… with potentially 5%-10% of that gain in a single morning.
“With potentially MUCH bigger gains to follow, once the media picks up on this story… and the medical lab industry begins to consolidate.”
I’d say the medical lab industry has already begun to consolidate… it’s been consolidating for decades, we didn’t used to have huge national labs like we do now. That’s not so different from any other industry, where scale and distribution favors the visionaries and the acquirers.
But which one is this? Thinkolator sez that Ferris must be hinting at: Quest Diagnostics (DGX)
That’s not a 100% certain match, but it’s by far the best one — Quest and Labcorp (LH) are the two largest diagnostics testing firms in the US, by far, and you’ll probably find both of them represented in most towns, but Quest is the one that claims to serve half of the doctors and hospitals in the US… and it also maintains better gross margins than Labcorp (partly because Labcorp also owns Covance, a contract research company, while Quest is more squarely focused on diagnostic testing).
Both are large companies — Quest has a market cap around $12 billion, Labcorp about $15 billion, and both are trading at reasonable forward valuations (2018 PE of 16 for DGX, 15 for LH) and growing… Labcorp is forecasted to have a faster earnings growth rate than Quest, but Quest has recently been somewhat more underestimated than Labcorp when it comes to recent earnings forecasts (meaning, their earnings have been bigger “beats” of the consensus estimates this year). Both have been getting low-single-digit revenue growth, and have analyst forecasts of high-single-digit earnings growth for the next five years.
Which, frankly, makes both of these diagnostics giants interesting and probably slightly undervalued investments — they’re strong, they’re consolidating the industry and have been for years (buying up or partnering with lots of smaller players and winning contracts with large medical groups and insurers), and they’re expected to keep growing and to keep getting slightly more efficient as they grow, boosting earnings.
That’s true whether or not this new regulatory change makes an impact on the market — I suppose the meaningful risk factor is a general move to cut unnecessary testing in order to reduce medical costs, and that is a frequent conversation among medical policy pundits (though pricier things like MRIs are more often in the crosshairs than unnecessary blood tests), but it’s also hard to envision a change to the national psyche that makes us suddenly become more comfortable with having less information.
So… will this new change to Medicare Part B and their reimbursement levels for medical tests make Quest shares soar?
I can’t claim to be an expert on the industry, as you might have guessed, but we can see the analysis that Ferris quotes from Joseph Burns at Dark Daily here — and his general tone does support the idea that the big national labs will be the relative winners…
“Unwarranted deep cuts in Medicare Part B lab test fees will work in favor of large labs at the expense of smaller labs”
Part of that argument is that because pricing data on which new Medicare Part B reimbursements will be based is not actually reflective of current pricing in the broad testing market, mostly because they didn’t collect enough data from smaller and higher-cost operators, prices will be skewed too low. To me that doesn’t seem likely to sway cost-cutters in government who are desperate to find something on which they can spend less, particularly since they aren’t allowed to use their buying power to lower effective drug prices, but that’s just my sentiment — perhaps the hospitals and physician labs will have champions in Congress who push for changes to the reimbursement… most likely, I would guess, because some small town labs wouldn’t be viable at lower prices and they want to preserve services.
The law itself is basically as described (you can see the actual text here if you like) — Medicare is instructed start paying the median price for diagnostic tests (like when you get your blood drawn at a lab), instead of paying the “retail” price like they apparently did in the past, and they’ve been using the past year or two to collect data to “set” that price.
Quest, at least on paper, is “deeply disappointed” in the rates announced in September — I don’t know whether they’re crying crocodile tears or not, but they object to the lower reimbursement prices they’ll receive starting in January.
And their investors and creditors are also mindful of the negative impact — the new lower Medicare reimbursement rates for testing that were announced in September were lower than expected, and both Quest and Labcorp fell, with Quest taking it the hardest. That pretty much wiped away the premium valuation they had earned over the past year or two, after five or ten years of very stodgy stock performance.
So yes, if you want the other side of Ferris’ argument, there are analysts who say that Quest will be an “immediate loser” under this new pricing…. though even that analyst who is quoted as being worried about the short-term hit from these “draconian” cuts, Mark Massaro at Canaccord, says it will benefit the big guys in the end…
“We believe the brunt of the cuts will impact ‘mom and pop’ small labs that lack scale, and believe this environment will allow lab leaders LabCorp, Quest and even Genomic Health to consolidate weaker players….”
So that’s a similar argument, that these cuts will end up being good for the big players in the end… though it’s certainly not Ferris’ “Quest will jump 5-10% on January 1” kind of assessment that we’re seeing from other commentators. The consensus earnings estimates have come down slightly for next year, but only by about 2% since the September “shock”, and there has only been one analyst downgrade of DGX since the pricing announcement. If Ferris is right about this being immediately good for Quest (assuming that’s the stock being teased), he’s also outside the consensus on this one… standing out from the herd can often be a good thing, of course, but it’s important to understand that there are two sides to most of these “story” stock pitches.
In the end it’s your money, though, so what do you think? Does the long-term benefit of squeezing out some smaller competitors make it worth absorbing the possible earnings hit of a 10% cut for Medicare test pricing? Will Quest outperform the market for the next few years, or do you think they’re still too expensive for their expected growth potential? Let us know with a comment below.
P.S. We continue to collect subscriber opinions about the newsletters they’ve tried — so if you’ve ever subscribed to Extreme Value, please click here to let your fellow investors know what you think. Thanks!
P.P.S. Yes, Ferris is still pitching that “visible gold in Newfoundland” idea in this ad as well, calling his second teased stock “The Next Great Royalty Company: A Low-Risk Shot at a 10-Bagger” … and that must still be Altius, which he teased using that Newfoundland gold property years ago, when it was being explored by a partner (that partner no longer exists, but someone else is exploring it now). Yes, I like and own Altius, but their gold properties in Newfoundland are all still very early-stage exploration projects… they provide some upside potential, largely because Altius will get royalties and perhaps a junior stake in any mines that result from their partners’ exploration, depending on the specific deal (there’s more than one Newfoundland gold exploration project in their portfolio now, so it’s no longer just the original Viking project), but not anytime soon… and there’s not a high probability of the impact being significant.