Check-up for Community Health

10/09/2014 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

We’re seeing lots of growth stocks holding up despite the turbulence out there; overall, then, we remain in a cautious stance, preferably buying on dips, suggests Mike Cintolo, editor Cabot Top Ten Trader.

The strength of Community Health Systems (CYH) stock comes down to three factors. The first contributor is the huge expansion in the number of US citizens who have health insurance following passage of the Affordable Care Act (ACA).

This one factor was a boon to hospitals, which previously had to provide medical care to patients regardless of their ability to pay. Community Health’s revenue growth of 29% in Q1 and 50% in Q2 (after years of mostly single-digit or negative growth) owes much to ACA.

The second contributor is the company’s $7.6 billion acquisition of Health Management Associates last year. The deal, which finally closed on January 27, 2014, made Community Health the largest hospital chain in America, with 206 hospitals in 29 states with a total of 31,000 licensed beds.

The third factor is the settlement of a suit brought against Community Health by the Department of Justice that accused it of improper billing practices.

The company settled the lawsuit by paying around $89 million to Federal and state authorities, removing the cloud over its operations.

Investors have been betting that the combined company’s larger scale would increase its efficiency, and the 95% increase in earnings in the company’s latest quarterly report is good evidence of that.

Community Health does have about $17 billion in debt, but its combined operations should allow it to reduce that over time. With two good stories to its credit, Community Health Systems looks like a healthy winner.

CYH rallied strongly through 2012 and the first half of 2013, soaring from $15 to $51. Then came a nine-month correction to around 35 (following news of the HCA acquisition) that bottomed in April 2014.

The rally that broke out on big volume in late May has had legs, and CYH has been rallying since then. In September, the stock pushed to new all-time highs and is now consolidating that.

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