Seeking Alpha
Long/short equity, long-term horizon, registered investment advisor, CFA
Profile| Send Message|
( followers)  

It's not every day that investors get to hear the world vision of Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. (NYSE:JPM). However, they had that opportunity at this year's JPMorgan Healthcare Conference in San Francisco, Calif., which featured a record 395 public and private company presentations. A highlight of the conference came when Mr. Dimon was interviewed by CNBC's Maria Bartiromo, and any subject material, particularly troubling U.S. and World issues, was fair game. These answers would not be his typical sound bites specific to the banking and financial systems. Therefore, this audience of healthcare professionals (ranging from CEOs, scientists, and investors), was naturally keen to see how he would respond. Jamie Dimon did not disappoint and delivered answers in his usual to-the-point, common sense manner. I have summarized below his answers that have significant investment implications and provided my investment takeaway.

Regarding How to Invest in an Environment Seemingly Full of Geopolitical Uncertainty: "Geopolitical matters are present all the time (particularly in light of Iran and Strait of Hormuz)."

Investment Takeaway: Mr. Dimon does not believe that there are more or less geopolitical concerns present in the world than in history. Investors should be accustomed to this fact and not use it as an excuse to say investing is now more difficult. This is a fair point. Are there really more worldwide political problems to pay attention to today than in the past? Could it be that news flow has sped up because of information technology and globalization? Now an environment has been created where it seems the world has more rogue nations and leaders when in actuality no substantial change has really occurred. If so, as an investor it is important to desensitize ourselves in a world where one can be inundated by negative headlines. Striking a fine balance between acting appropriately cautious and exhibiting decision paralysis has become ever more essential.

Regarding Financial Companies and the Need for Stress Tests: "Is there a better stress test than what just happened (in reference to collapse of Bear Stearns, Lehman Brothers, etc.)."

Investment Takeaway: U.S. and European leaders are working hard to come up with the ideal stress test. Are these government officials unaware that many of our financial firms just survived near-death experiences? There is no better stress test than the financial meltdowns that just occurred in the U.S. and are ongoing in Europe. In simplest terms (from Mr. Dimon), "look at those financial firms that have never lost money during this time and can still pay dividends (i.e. JP Morgan Chase)." These are real-life situations that should be utilized by the world's governments to prevent future financial disasters. Too much time is being spent on devising the "most appropriate" financial model, when the stressors we are trying to predict are right in front of us. Given this, investors need not first see sovereign governments' stress test results in order to make an appropriate investment decision. Investors have a plethora of relevant data to conduct a meaningful downside scenario analysis for their financial holdings.

Regarding U.S. Energy Dependency: "The U.S. is currently experiencing an energy boom (referencing JP Morgan's Energy Analyst's research regarding U.S. onshore oil and gas-rich shale plays)."

Investment Takeaway: In his most recent 'State of the Union', President Obama said, "Right now, American oil production is the highest it's been in eight years." Until this speech, most news outlets and many politicians would have Americans believe that the U.S. has become even more dependent upon foreign oil since British Petroleum's (NYSE:BP) Gulf of Mexico oil spill. President Obama has also been consistently criticized for his slowness in selling leases in Alaska and the Gulf of Mexico, demonstrating that the myth, "For if we can't drill in the deep ocean, we shall never find oil," is ingrained in our minds.

This could not be farther from the truth. U.S. oil companies are not only discovering more oil in significant quantities, but also succeeding on the continental U.S. The Bakken Shale (Montana and South Dakota) is on track to produce in excess of 800,000 BOE/day vs. Alaska's 550,000 BOE/day. Goldman Sachs estimates that the U.S. (currently the world's No.3 oil producer) could surpass Saudi Arabia and Russia by 2017 to become No.1. Locations such as the Eagle Ford Shale (Texas), Marcellus Shale (predominantly Pennsylvania and West Virginia and showing signs of becoming more oil bearing), Mississippian (Kansas and Oklahoma), Permian Basin (Texas) and Utica Shale (Ohio) are also showing promise. Thus, partly due to these discoveries in combination with increased energy efficiency, U.S. net petroleum imports have fallen to 47 percent of the nation's consumption, down from a record 60 percent in 2005 - the lowest in 15 years (Source: EIA).

This trend should continue because the newer oil plays, including the Bakken, are still in the early stages of development and the number of domestic oil rigs in operation is at a 24 year high. Secondarily, but of long-term strategic importance, the U.S. is now arguably the "Saudi Arabia" of natural gas. Excess inventory has depressed natural gas prices for the last few years and prices could now breach 10 year lows. Because of the decreasing profitability, natural gas drilling is slowing. However, the high rig count may counter this effect as natural gas is often a byproduct of oil drilling (and vice versa). In the long run the U.S. could become a net exporter of natural gas since Asia and Europe prices are 2-4x ours.

All in all, the U.S. is a leader in the global energy industry, not a laggard. In the last couple years countries worldwide are taking notice. Atinum of Korea, BHP Billiton (NYSE:BHP) of Australia, CNOOC (NYSE:CEO) of China, Reliance Industries of India, Repsol of Spain, Sinopec (NYSE:SHI) of China, Statoil (NYSE:STO) of Norway and Total (NYSE:TOT) of France (to name a few) have all formed partnerships with U.S. exploration and production companies in order to gain access to these new oil fields.

For investors new to these oil discoveries, educate yourself and ignore the political rhetoric. What goes on in Washington mostly involves the lobbying power of the mega-cap, multinational integrated oil companies. Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A) have been too focused on ocean drilling and thus have been slow to gather meaningful acreage in these new continental U.S. oil plays. Investors desiring to learn more about the U.S. oil boom need to step out of their comfort zones and focus on the smaller, U.S.-only exploration and production companies. Most of the early leaders, (Continental Resources (NYSE:CLR), EOG Resources (NYSE:EOG), Range Resources (NYSE:RRC) and SandRidge (NYSE:SD)), in the aforementioned locations are not household names. This is not comprehensive list -- it's an indication that there is a wealth of oil right in our backyard. Focus on the positive. Do not let the lack of drilling in the Gulf of Mexico or Alaska distract from a huge investment opportunity.

Regarding U.S. Healthcare Reform: "Yes, to universal healthcare, but right now we are just adding to a bad system."

Investment Takeaway: Our healthcare system is a juggernaut and it is not going to undergo a massive overhaul overnight. However, many think that just by utilizing electronic health records ("EHR") alone with our current health system significant improvements can be had. EHR is currently being implemented on a massive scale. The hope is that better handling and processing of what was a voluminous amount of paperwork should eventually increase efficiency and reduce errors in the healthcare system. This in turn would then lead to the ultimate goal where healthcare quality increases while costs decrease. With higher EHR adoption, the healthcare community is now starting to evaluate it with a more critical eye. In regards to whether EHR is just adding to a bad system the healthcare information technology panel, "Beyond Meaningful Use: What's Next for Health IT," did a great job of addressing this issue. Panel members included:

  • Atif Rahim, Senior Equity Research Analyst - JP Morgan, as Moderator.
  • Chas Roades, Chief Research Officer - The Advisory Board Company.
  • Christopher Olivia, MD, SVP Strategic Planning and New Venture Development - Highmark (third largest integrated payer-provider system after Veteran's Administration and Kaiser). Mr. Olivia has also started two medical schools, turned around two hospital systems and served on the board of nine venture-backed healthcare IT startups.
  • Edward Murphy, MD, Advisor - Towerbrook Capital Partners and Professor of Medicine - Virginia Tech Carilion School of Medicine. He was also CEO of Carilion Clinic (a 7 hospital and 600 physician system) for ten years.

Current Assessment of Health IT:

  • EHR needs to be more than just a "cool" tool. Doctors have to see ROI and currently do not know if it is necessarily more efficient or falls to the bottom line. Implementation is more costly for smaller practices.
  • EHR effectiveness is limited by human error. Data still needs to get into the system correctly and the number of incorrect diagnoses remains high. Patients also poorly adhere to medication schedules.
  • Change management is critical, because there is only so much cost cutting that can occur. Change in hospital and physician culture/behavior is necessary in the long run. Right now hospitals buy providers to enforce the rate/volume business model to cover costs. This just reinforces oligopolies (creating pricing power) rather than incenting cost/quality. Examples were also given showing how services that could save money and make the patient happier end up creating conflicts of interest because they are less revenue generating for hospitals and/or providers.
  • Ultimately innovation is driven by economics (increased pricing pressure), not by government.

Next Steps for Health IT:

  • Guidelines and data need to be real-time, essentially at point of care, so treatments can be optimized. For example, in cancer 30-40 percent of doctors do not follow treatment guidelines.
  • Physicians must be encouraged to engage and embrace IT. Having new generations of physicians should help, but much effort is needed to get IT companies and doctors to work together.
  • IT will eventually focus more on the patient. Right now information is asymmetric (see JP Morgan Healthcare Conference 2011). Scheduling appointments online is a small step towards increased transparency for the consumer.

The critical take-away from this Health IT panel is that technology adoption in the healthcare system is in its early stages. The surface is just being scratched, but not without challenges. Success will require a team effort from all parties involved. From an investment standpoint, companies like Allscripts Healthcare Solutions (NASDAQ:MDRX), athenahealth (NASDAQ:ATHN), Cerner (NASDAQ:CERN) and Quality Systems (NASDAQ:QSII) have the most to gain or lose. These have been high valuation stocks for the last few years based on a hope that their products add value. Will their software generate the necessary ROI and continue to garner interest after the honeymoon stage? Are these companies only going to focus on the back end of health IT, while many startups focus on the front end (consumer/patient and mobile)? The answers are not so clear cut --shortly time will tell if these EHR companies can deliver.

Conclusion

Jamie Dimon's interview with Maria offered many ideas for investors. Though his remarks were succinct, they should not be overlooked -- as demonstrated, there is great depth behind these statements. The four topics discussed have been instrumental in contributing to the market uncertainties of the last few years. A proper grasp of these issues is critical, as it should enable investors to better manage risk and add value to their investment portfolios. This article is one view of the long-term investment implications, and each investor is encouraged to come to their own. I look forward to the valuable insights that can be had at next year's conference.

Disclosure: I am long SD.

Source: JP Morgan Healthcare Conference 2012: Insights From Jamie Dimon