This Top Pick for small-cap growth & value investors provides behavior health care, including treatments for mental health issues and addiction, notes Doug Gerlach, editor of Small Cap Informer.

Acadia Healthcare (ACHC), based in Tennessee,is the largest provider of behavioral care facilities in the country by revenue, locations, and number of beds. It operates 568 facilities with approximately 16,900 beds in 39 states.

The stock has lagged since we first became interested in the company in December 2014, largely due to its acquisition in 2016 of Priory Group, a U.K.-based operator of behavioral health facilities.

A U.K. investigation into whether the purchase created a “monopoly position” was settled when Acadia agreed to divest 21 of the 300 facilities that it had purchased from Priory.

With the uncertainty of this investigation now resolved, the company can now return to focusing on its regular operations.

Growth for Acadia Healthcare comes from both acquisitions and from expanding the number of beds in its current facilities.

Addiction care is a highly fragmented market, with plenty of opportunities to purchase, upgrade and expand facilities while delivering cost efficiencies.

We expect that the company will be able to add significantly to EPS especially as it integrates its Priory Group facilities, the largest purchase in the company’s history.

The stock has suffered in the market from concerns about the UK investigation, rising higher interest rates, and possible changes to the Affordable Health Care Act that might affect the company.

We think that pessimism is excessive and provides an opportunity for more-aggressive, risk-averse investors.

At a current P/E of 14.4, ACHC looks to be at an exceptionally low valuation, as compared to its expected growth rate, average market valuations for peers, and based on the stock’s history.

We select a high P/E for the next five years of 23. With high EPS expected to reach $4.72, our forecast high price is $108, from a recent price of $35. Total return could reach 25% annually for the next five years.

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