Steven Cress, Quant TeamSA Quant Strategist
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NicoleBenjamin: Hey everybody. It’s Nicole Benjamin, your host here at Seeking Alpha to bring to you another episode of The Weekly Grade, where we’re bringing to you market insights in minutes. Now, joining us today is none other than our wonderful Emma Johnston. She is our Senior Quantitative Strategist here at Seeking Alpha. She’s been in the industry for about 10 years now. And if you’ve been following along, I’m pretty sure you guys have seen her on our Alpha Picks webinars and some of our PRO Quant Portfolio webinars. So, Emma Johnston, thank you so much for joining us today.
EmmaJohnston: Thank you so much, Nicole. I’m thrilled to be here
NB: Absolutely. Now, I want to jump right in. We’re looking at A Defensive Play With Demographic Fuel for BrightSpring Health. So, on this slide, I see 5% of the population drives about 50% of healthcare spending. As investors are building this rotation into defensive sectors, how does BrightSpring’s homecare model cut these hospital costs while capitalizing on the aging demographic?
EJ: It’s a great question. And there’s a few interesting things going on in the market right now. I’m sure for many students of the market, we’ve seen this risk-on, risk-off spin cycle. And one of the beneficiaries of that has been the healthcare sector, which is traditionally defensive. And I think that’s intuitive when you think about it a little bit. Right? Regardless of what’s going on in the economy, healthcare remains an inelastic thing. Folks are always going to need it. And so that’s where we bring BrightSpring in.
It’s a really interesting company and really well suited for the moment. Not only because of this sector tailwind, but also because it addresses one of the biggest structural problems in the U.S., which is healthcare spending. I know we vote on it at least every four years and it continues to be a pain point. And you mentioned the demographic fuel there, and that is, of course, the aging baby boomer population, which is, of course, inflating healthcare costs. And that’s where BrightSpring comes in.
It is this really interesting home and community based model that helps lower costs by shifting care away from hospitals and coordinating pharmacy care to bring those to home settings and, again, bringing that pharmacy element under their umbrella, which helps bring these fragmented services together and over time and overall lower costs
And they really specialize in what is referred to as high acuity patients. So that is patients with complex needs, which are seniors and folks with disabilities, etcetera, who might see a number of different specialists and be on a number of different prescriptions. And they bring them all under the same umbrella to help coordinate better care. And it ultimately is lower cost so that – those are the, both the structural things driving BrightSpring’s recent success and also the novelty of their model.
NB: Now, speaking of their success, I see that BrightSpring is a Strong Buy as a part of Alpha Picks this month. So, how is the company maintaining such high factor grades on the site?
EJ: Yeah. That’s a great question. It is a recent Alpha Pick. It was selected last, or excuse me, two weeks ago, so July 15th. And it is one of a few healthcare companies within the portfolio. And it’s really interesting because healthcare is a sector where you can often see a lot of growth, but not necessarily profitability. And the combination of those two things for BrightSpring are a huge asset. Growth in biotech and health tech is obviously fantastic, but it does raise the risk profile on those stocks.
However, BrightSpring is really able to assert the success of its operating model and drive up the profitability scores. We’ve included some of these Quant Factor Grades that obviously all roll into the overall Quant Rating, and you can see that it’s got A range grades for both growth and profitability in a growth sphere that’s existed for some time over the last six months. And they’ve actually increased their profitability over the last three to six months going from a B+ to an A-
Of course, we try to identify securities that are fundamentally mispriced, meaning that the market hasn’t necessarily realized the strength of those underlying fundamentals. And the company’s actually very decently valued. It’s got an overall B- valuation score. Those are, of course, scored on a sector relative basis. So that is, it’s valuation relative to other healthcare companies. And one of the underpinning metrics of that is its PEG ratio, which I think sits at about 50% discount to the sector. That’s a price to earnings growth. And it’s part of our comprehensive valuation framework that assesses the opportunity beyond just an entry price.
Of course, the stock has great momentum as investors start to realize that, hey, this is a high quality company and it’s returned a great deal over the past year, but still managed to maintain that solid valuation score. And then in terms of revisions, analysts are really in-line with, I think, what we’re seeing across its fundamentals. Their earnings growth trajectory looks really solid. I believe they had something around 13, yeah, 13 up revisions versus just or zero downward in the last 90 days. So, a very healthy company we’ve got here across fundamental metrics and those important timeliness indicators like momentum and earnings revisions.
NB: Speaking of Alpha Picks, the portfolio is up 352% since inception, outperforming the S&P 500. So, how does this quantitative model consistently spot under the radar healthcare winners like BrightSpring before the rest of the market really catches on?
EJ: It’s a great question. And Alpha Picks, as you folks may or may not know, is derived from our broader Quant system, and it takes those 5,000 or so stocks that are graded on a daily basis and it distills it down to two actionable picks on a monthly basis. And what we’re really doing in a highly sophisticated way is aggregating all this disparate information. So, financials, analyst sentiment, operating information, etcetera. And we drill those or distill those down into an instant characterization across those five factor grades.
And as I mentioned in the earlier slide, one of the key pillars of this framework is valuation. So, we’re aiming to find the companies with the strongest fundamentals that have yet to be fully priced in to the market. And so that valuation score remains a key indicator there. And that is where BrightSpring really excels. It’s got a B- valuation at this point. When you look at that alongside both its growth and profitability, it does look like it’s got quite a bit of room to run. So, very strong stock we’ve got here.
NB: Alright. Well, I think we’ll wrap things up there. Thank you so much, Emma, for joining us today. And for everybody that’s listening in, go ahead, click the link on the article. Go see if BrightSpring might be right for your portfolio. And if you haven’t already, take a look into Alpha Picks. See if that might be something you’re interested in, and we’ll catch you here next time
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