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3 Stocks to Watch as Hospital Industry Stages a Recovery

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The hospital companies suffered a major setback last year as they had to delay non-emergency medical procedures to accommodate the COVID-infected patients. Hospitals also had to incur elevated expenses to keep the healthcare workers safe as well as treat a huge number of coronavirus patients.

High demand for medical equipment induced a surge in prices, which drained the margins of these companies. In order to curb costs, companies took several initiatives, such as temporary salary reductions, furloughing employees, etc.

However, this bleak financial situation, mainly caused by lower admissions and halted medical procedures, is now recovering. Year to date, the Zacks – Hospital industry has gained 26%, outperforming the broader market. The Zacks S&P 500 composite has rallied 13.1% in the same time frame while the Zacks Medical sector has gained 0.3%. Notably, the industry’s earnings estimate for the current year has been revised 34.8% upward in the past year.

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Companies in the industry are well-poised for growth on the back of strategic acquisitions and divestitures, cost-curbing initiatives, digital expansion, strong capital deployment, penetration into new geography, telehealth services and a rebound in patient volumes. Diversification of business and addition of capabilities alongside growth in niches should add to this overall upside. With the major population being fully vaccinated against COVID-19, hospitals are taking up elective procedures after a long gap.

Some of the leading hospitals, such as Tenet Healthcare Corporation (THC - Free Report) is undertaking strategic divestitures at a steady pace to eliminate its non-core and unprofitable business units to streamline operations and repay debt. The leading players are also likely to gain from government business, which consists of Medicaid and Medicare Advantage.

Hospitals with behavioral platforms are likely to benefit as the pandemic significantly spiked the drug abuse syndrome and mental health issues. For instance, Universal Health Services, Inc. (UHS - Free Report) zeroes in on behavioral indications like eating disorders, sexual trauma, autism as well as disorderliness in the military through its patriot support program. The company tried every trick in the book to boost its behavioral health portfolio through joint ventures. This segment holds immense scope for growth in the days ahead, considering the dire need of addressing behavioral health issues triggered by the pandemic.

The Zacks Hospital industry is currently undervalued compared with the Zacks S&P 500 composite as well as the Zacks Medical sector. The price-to-earnings (P/E) trailing 12-month ratio, the best multiple for valuing hospital companies, is 16.49X, lower than the Zacks S&P 500 composite’s average of 27.86X and the sector’s P/E of 25.94X. Such below-market positioning hints at more room to run in the coming quarters.

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Zacks Investment ResearchImage Source: Zacks Investment Research

Stocks in Focus

With the help of the  Zacks Stock Screener, we selected four hospital stocks that are well poised for growth, riding on operational strength. These stocks have outperformed the industry year to date and also witnessed upward estimate revisions in the past 60 days. That all the companies have growth potential is evident from their favorable VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Acadia Healthcare Company, Inc. (ACHC - Free Report) provides behavioral health care services in the United States and the United Kingdom. It currently has a Zacks Rank #3 (Hold). Accretive acquisitions, strong top and bottom-line growth and a solid balance sheet should drive long-term growth. The company has witnessed its 2021 earnings estimate move 4.7% north over the past 60 days. The stock has gained 31.6% year to date.

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Community Health Systems, Inc. (CYH - Free Report) is one of the largest publicly-traded hospital companies in the United States, and a leading operator of general acute care hospitals and outpatient facilities. It carries a Zacks Rank of 3, presently. An aging population, growing demand for healthcare services, declining expenses and accretive acquisitions are its key positives.

The stock has witnessed its current-year earnings estimate move 257.9% up over the past 60 days. The expected long-term earnings growth rate is pegged at 9.6%. The stock has risen 106.2% in the year-to-date period.
 

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Headquartered in Dallas, TX, Tenet Healthcare Corporation is an investor-owned health care services company, which owns and operates general hospitals and related health care facilities. The company holds a Zacks Rank #2 (Buy), currently. Divestitures, acquisitions and growth in the outpatient business along with lower expenses are its tailwinds.

The stock has witnessed its current-year earnings estimate move 17.4% up over the past 60 days. The company’s shares have gained 69.5% in the year-to-date time frame.

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