The coming year presents significant opportunities for investors, but it probably presents even larger challenges. My reasoning follows in the depths of the article, but for those wanting a cliff notes version, Healthcare, technology, and utilities, all hold significant opportunities over the next year, but place your bets with care. In healthcare, Community Health Systems (NYSE:CYH) offers strong growth prospects, despite an already significant run, while Tenet Healthcare (NYSE:THC) is also worth a look. Among technology stocks, Alcatel-Lucent's (NYSE:ALU) lightRadio seems likely to lift Alcatel out of its doldrums and to a much higher share price, while Cisco (NASDAQ:CSCO) offers a less risky - but potentially less rewarding - alternative tech play. In the utilities sector, National Grid (NYSE:NGG) promises a strong, safe dividend yield, coupled with the prospect of significant share appreciation.
Looking at healthcare, the Patient Protection and Affordable Care Act, commonly called Obamacare, has changed that sector's landscape. Any time there is a paradigm shift in an industry, opportunities abound; unfortunately, so do pitfalls. Through a careful analysis of key issues, we can identify many of the downsides, and increase odds of picking winners. To me, two areas that will clearly win under Obamacare are the for-profit hospitals and companies dealing with electronic health records management. For this article, I'll focus on for-profit hospital ownership and management companies.
In the recent past, and continuing today, hospitals in this country have been the safety net for the uninsured and underinsured. Thanks to the changes incorporated in Obamacare, hospitals will have fewer instances of having to write off fees for those populations. In addition, the for-profit segment is growing, often through partnerships with non-profit or government-owned hospitals. These partnerships allow for many of the sunk costs to be carried on someone else's books, while producing lucrative income streams for the for-profit management company. In addition, many government-owned hospitals are municipal or county properties; these governments are going to be even more squeezed as federal funds to local governments dry up, and local pension liabilities continue to overshadow municipal finance. The ability of private managers to operate the hospitals in a more cost-effective manner than their government counterparts (due to differences in what's allowed, not necessarily any greater managing skill) are enticing more partnerships, and the private sector management teams are driving the conversations and terms.
Among publicly-traded, for-profit hospitals and hospital management companies, I like the near- and intermediate-term prospects of Community Health Systems. CYH has shown great price appreciation in recent months, as many realized the significance of the elections to Community Health's prospects over the next four years. Notwithstanding its share price appreciation of over 20 percent over the past three months, CYH has lots of room to grow. As it boasts on its investor relations page:
"Community Health Systems…affiliates own, operate or lease 135 hospitals in 29 states, with an aggregate of approximately 20,000 licensed beds. In over 55 percent of the markets served, CHS-affiliated hospitals are the sole provider of healthcare services."
Time targeted CYH four years ago as a company likely to prosper under President Obama, and they were correct. Since the President's first inauguration on January 20, 2009, CYH has appreciated over 104%. Sounds good, right? It is. CYH trounced the returns of the Dow Jones Industrial Average by nearly 35 percent, and the S&P 500 by over 20 percent. Only the Nasdaq, which greatly benefited from the explosive growth of Apple (NASDAQ:AAPL), came close, but CYH beat that index, too, though only by one percent, a statistical tie over a four-year window.
Despite its robust growth, with so many hospitals and, more critically, hospital beds under its management, Obamacare promises to be a bigger boon to CYH going forward than the past four years have been. In the past, many indigent patients' emergency room visits had to be written off. My local hospital writes off over four million dollars per year in uncompensated care, and Bellingham/Whatcom County is a smaller metropolitan area. Nationally, in 2007 (the most recent year for which I found good information) hospitals across the US provided $34 billion in uncompensated care, or an average of nearly $7 million per hospital! These charges have risen by about 20 percent over the past two decades. Under Obamacare, reimbursements will flow to these costs that are currently written off, as healthcare access becomes more widespread - and CYH is perfectly positioned to benefit. Also worth investigating in healthcare is Tenet Healthcare . Both companies have had significant run-ups since the United States Supreme Court ruled Obamacare is constitutional, but still hold strong growth prospects as Obamacare unfolds.
Technology is the third sector I've identified as a growth opportunity this year. When times are tough, businesses look to reduce labor costs and increase productivity. Declining revenues - or the threat of them - enforces a discipline less rigorously applied when times are flush. The past four years have provided ample proof of this, as productivity has risen markedly while the labor force shrank. As we grow out of the Great Recession, cash hoarding by businesses will be replaced with greater investment in both equipment and additional labor, but leading with equipment. Understanding how these investments play out can identify undervalued equities poised to cash in on these investments.
Viewing this market ecology, telecommunications is everywhere. Telecommunications is essential across nearly the entire spectrum of business activity. There are a number of different plays one could make in this sector, starting with the service providers, such as Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint Nextel (NYSE:S), and T-Mobile. Other interesting opportunities include the companies owning towers, the real estate under them, and the technology driving them. Analysis suggests, though, that the appreciation that's already occurred in the sector, as major cell tower companies have converted to REITs, has raised the valuations of cell tower holdings to a level that I find less compelling, near term.
On the other hand, examining the technologies used in cell towers brought a couple of prospects to my attention, particularly Alcatel-Lucent. ALU is the combination of the Bell Labs component of the 1996 AT&T breakup (thereafter known as Lucent) with French telecom giant Alcatel, which bought Lucent in 2006. The company is getting lots of positive buzz from its new lightRadio signal architecture. Alcatel's in-house magazine, TechZine, offered a good overview of the technology last February, but interest has really picked up over the past couple of months. lightRadio offers a significant technological advance - and an opportunity for strong revenue growth at ALU. With the price of the company under $2/share, it is also getting the attention of value investors, and SA contributor Muhamed Bazil noted this as a good entry point in an article earlier this week. While several analysts note a recent record of declining profitability at ALU, lightRadio promises to be a gamechanger, offering investors an opportunity to get in early on a significant growth cycle. Clearly, not a risk-free investment, but an opportunity where those with some tolerance for risk can leverage some out-sized growth prospects in the current environment. For those seeking exposure to this segment, with less downside risk, Cisco is a good play.
For those with a lower risk tolerance, the utility sector offers multiple good plays. In particular, I like National Grid, an electrical transmission and generation company headquartered in Great Britain, and with operations in the UK, France, and the northeastern United States. With a current dividend of 4.1 percent, NGG offers a rich bonus over bank interest offerings, while offering the safety of an established utility with strongly positive cash flows. Dividend policy for the coming few years will be set this April, as noted by DividendInvestor in his SA article two days ago, so the yield may move, but is likely to remain significant. Its operations and asset distribution offers better protection of cash flows through geographic and political diversification than most utilities. While NGG carries significant debt, its interest coverage of 3.6 demonstrates it's on solid footing, while Price-to-Book ratio, at 2.8, is at the low end of its historical averages, indicating there is room for share price appreciation as well. With interest rates remaining low, and energy demand growing as the economy heats up in the coming year, NGG is a good play for the conservative investor.