WASHINGTON, June 5, 2015 – The Prudent Man suddenly got involved in a local (Washington, D.C.) area IPO yesterday when it showed up at the last minute. This tech- and health-oriented Arlington, Virginia-based company is called Evolent Health (new symbol: EVH). The new shares opened fractionally up this morning in initial New York Stock Exchange (NYSE) trading after pricing last night at $17 per share.
Like similar companies and certain corporate divisions, EVH is a creature that evolved from the fallout of Obamacare. The company states it is “focused on the prevention of future illness and how to improve the efficiency of health systems.”
That’s the simple explanation.
According to the more technical Wikipedia entry on the company,
“Through their technology platform, Identifi, [the company’s] data analytics enable physicians to identify high risk individuals and create targeted interventions personalized to that individual. Care is coordinated through a care team that works to engage the patient in their health and provide all aspects of care and assistance to the patient as needed.”
In other words, Evolent helps physicians keep their costs down by carefully following electronic patient records via their software and consulting services. The goal, it would seem, is to keep those costs within Obamacare bounds (fair or not) for each practice. That’s something every health providing insurer, company or practice is keenly focused on these days, and for obvious reasons.
The fact that companies like Evolent exist is a tribute to what happens when Washington’s bureaucracy is allowed to extend into areas outside its competence, which these days seems to be everywhere. Doctors and institutions more interested in patient care than paperwork are almost forced to hire on such services or run such software, or actual patient care would cease to exist.
EVH—like most IPOs, currently operating without a profit on the books—is likely to prosper as long as the government burrows into the massive business of healthcare. Therefore, it was worth gambling on its IPO. Indeed, the entire healthcare complex of stocks has been booming since Obamacare went into force.
Given the now massively forced redirection of taxpayer dollars to this sector, it’s been a no-brainer. The only caveat is that if the Supreme Court rules (correctly) that Obamacare subsidies to states that have not set up their own health insurances exchanges—a substantial majority of 37 or so at last count—these stocks will be subject to an extraordinarily violent, albeit temporary, implosion likely to send investors into their 1950s fallout-era bunkers.
EVH has been picking up steam since this morning’s open. Currently trading at $19.15 as of 2 p.m. EDT, up over 12 percent, our shares will certainly help offset three secondary offerings we’ve recently bought into, namely shares of Molina Healthcare (MOH), Forest City Enterprises (FCE/A), and Sabre (SABR).
“Secondaries” resemble IPOs in that they are indeed issues of new stock. But these issues are offered by companies that are already publicly traded. Hence, they are “secondary” placements, or “secondaries.”
These offerings give you a chance to pick up a decent company at a good price since the current stock price usually drops before the issue comes out, due to the fact that the new shares will cause a “dilution” in earnings per share. I.e., same earnings vs. more shares equals lower earnings per share.
In the best of all possible worlds, of course, the company has issued the new shares in anticipation of better earnings, or, better yet, to purchase another company whose synergies with the purchasing company will more than recoup the investment and also increase earnings.
Living in much the same world as EVH, Molina is a vastly bigger, more established company. To slightly oversimplify, their primary business is managing or helping to manage state Medicaid programs, which, in case you weren’t aware, are weird governmental hybrids that provide basic health insurance subsidized by the Feds but primarily run (and substantially funded) by the individual states, which is why state programs differ, sometimes substantially.
To get involved in this action, California-based Molina must win a contract from those states that issue them. Recently, the company won a substantial contract from the State of Michigan, a contract it had never previously held.
That’s the bulk of the reason why the company offered a secondary. It will primarily use the revenue from this offering to set up shop in this new (for Molina) state, presumably recouping its investment and increasing profits as it adds tens of thousands of new customers to its portfolio.
Growth is good. However, with health-related companies at their price-peak right now, Molina, like EVH, the pharmaceuticals, the hospitals, the equipment makers and everyone else in the healthcare arena, the near-term risk to Molina and the others is the same—a Supreme Court ruling invalidating Obamacare subsidies to the majority of states who’ve refused to run their own health insurance exchanges.
As a fairly expensive stock, MOH could take at least a temporary shellacking if the Court goes against the Administration, which it should, since this is the way Congress wrote the law as a means to coerce states into setting up their own exchanges. We’ll just have to wait and see. But the ruling is due just a bit later this month as the Supremes wind up their current session and get out of town until the fall. That could happen to healthcare stocks as well.
Forest City is essentially a development company still nominally headquartered in its original home of Cleveland, Ohio while making most of its current investments in more lucrative and growing urban areas like New York City and Washington, D.C.
Forest City stock has been stuck in the mud seemingly forever. But it’s evolving into a potentially high-yielding REIT, target date January 1, 2016. This means its lucrative current commercial holdings could throw off some nice income, making it conceptually more attractive than it is currently as a C-corp, even though REITs remain under current pressure due to the bond business we discussed today in our companion column.
Sabre is a new-old company whose primary business is airline scheduling and reservations and associated services. Back in the day, it was known as EAAsy SABRE, with the AA standing for “American Airlines,” whose wholly-owned creature it was for many years. We used it to book flights online in the early 1990s when this pre-browser predecessor to the modern Internet was accessed on slow, 1200-2400 “baud” modems via a text-based, C-prompt-style interface.
Time marches on. American Airlines has had many near-death experiences since then, including at least two bankruptcies if we’re counting correctly, the last one of which was creatively finessed by combining American Airlines with U.S. Air to form yet another new American Airlines. In an earlier fiscal mess, American Airlines spun off SABRE as a separate company.
Which gets us to the now-independent Sabre’s current secondary. While airline stocks are currently in the tank—somewhat mystifying, given how full airliners are currently—our hopes for this secondary are pinned to ever-increasing numbers of reservations which ultimately must have a positive impact on Sabre’s numbers, the selloff in airline stocks notwithstanding. But you never know how things will work out.
Not expecting much of a pop if any on this pair of issues, we picked up shares in both secondaries when they ended up being offered substantially under the previous day’s closing price. So far, they’re living up to our expectations, barely treading water to slightly down. We suspect that much of this is due to current market conditions, although we never expected big moves.
Likely, we’ll have to hold these awhile to get some appreciation out of them.
But when you do the IPO/Secondary game, you have to do most of them, as benefits and first-day pops are, in the end, fairly unpredictable—a fact made worse given the tendency of brokerage houses to gift the very hottest IPOs to their wealthiest clients, freezing out the likes of peons like you and the Maven.
We’ll keep you posted on developments, as our brokerage essentially requires us to hold these puppies for at least a month before trading them out—also a handicap in this flip-happy, volatile stock market.
But again, bottom line: We wouldn’t do this if we didn’t come out net ahead on this action pretty regularly on an annual basis.