You should never slavishly follow the moves of another investor, no matter how good their track record. That said, I do take notice when a stock benefitting from one of my major macro themes happens to show up in the portfolio of an investor I respect.
This was precisely the case with Warren Buffett and DaVita HealthCare (NYSE:DVA). DaVita provides dialysis services for patients suffering from kidney failure or end-stage renal disease, operating more than 2,000 clinics and serving 153,000 patients nationwide. Dialysis is not a pretty business to be in, but it has extended the lives of countless kidney disease sufferers. For those that are not viable candidates for a kidney transplant, dialysis is the only hope they have of living a regular life.
I understand Warren Buffett’s rationale for liking DaVita’s business model. It’s stable and predictable. The average patient requires three treatments per week, and these are not something that can be skipped at the patient’s leisure. This is a “typical” Berkshire Hathaway (NYSE:BRK.A, BRK.B) investment in that respect.
Now, this is why I like it: kidney disease can affect any American at any age, but it is a bigger problem among the late-middle-aged and elderly. According to the Kidney End-of-Life Coalition, 45% of the more than 320,000 patients receiving dialysis therapy in the United State are over the age of 60, and the fastest growing segment of the dialysis population to be among patients aged 75 and older.
See where I’m going with this? The largest cohort of the Baby Boomers are still in their early 50s and not too far removed from their physical prime. But the front end of this generation is in its late 60s, and with every passing year a larger number of Baby Boomers find themselves at risk of chronic diseases like kidney disease.
From a demographic perspective, DaVita has an almost unlimited supply of patients coming down the pipeline.
What’s the downside? As I see it, DaVita has one major risk, and that is the federal budget. DaVita gets about two thirds of its revenues from Medicare, Medicaid, and other government programs. And in the company’s own words, “payment rates from commercial payors are significantly higher than Medicare, Medicaid and other government program payment rates, and therefore the percentage of commercial patients to total patients represents a major driver of our total average dialysis revenue per treatment.”
Expanded private insurance coverage under “Obamacare” should be beneficial for DaVita as it means more non-government patients, at least for now. There is always the risk that changes to Medicare reimbursements will crimp DaVita’s revenue growth or could squeeze its margins. This is something we need to consider. But in my view, the demographic plusses outweigh the government minuses.
Returning to Buffett, Berkshire Hathaway has been accumulating shares of DaVita for two years now and owns about 13% of the company. Given Buffett’s massive cash hoard of $46 billion might he be considering buying the company outright?
I have no way of knowing, but it looks like Buffett intends to stick around for a while. DaVita trades for 15 times expected earnings. This isn’t “dirt cheap,” but it’s not particularly expensive either for a company with DaVita’s growth prospects. Indeed, DaVita’s recent (March 31) quarter end results showed growth on both the top and bottom lines, and the company provided upward guidance for its full-year (2013) operating income.
Action to Take
Buy shares of DaVita at market. Plan to hold for 12 to 24 months or for returns of 100% or more. Use a stop loss that is appropriate for your investing style; I recommend something along the lines of a 20% trailing stop.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.