Surgery Partners (SGRY) IPO: Should I invest?

Our newest series, 3-up, 3-down takes a look at new IPOs and offers up three reasons to invest in them and three reasons to avoid them. Then, you decide. Let’s take a look.

3 reasons to invest in the Surgery Partners (SGRY) IPO

1) Rapid growth. Surgery Partners operates 99 surgical facilities – five of which are surgical hospitals – across 28 states. 200,000 surgical procedures were performed in their surgical facilities last year. Surgery Partners managed that feat in the 11 years since the company was founded in 2014.

That growth has helped the company achieve “industry leading same-facility revenue growth of approximately 9% during 2014, and an average of approximately 8% annually on a pro forma basis from 2012 to 2014.”

“Our pro forma revenue for 2014 was $871.2 million, which represents a compound annual growth rate of approximately 83% compared to revenue of $260.2 million for the year ended December 31, 2012,” the company writes in its S-1 filing. “For the six months ended June 30, 2015, our revenue was $457.0 million, compared to revenue of $147.3 million for the same period during 2014.”

2) Acquisitions. Surgery Partners has a proven track record of acquisitions. “Acquiring facilities has been a core component of our strategy since inception,” the company writes. They focus specifically on how they can create synergies between their company and their target acquisitions. The right acquisitions allow them to reduce head counts, close offices and pay less for supplies thanks to bulk ordering. “As a result of our recent acquisition of Symbion, as of June 30, 2015 we have achieved annualized cost and revenue synergies in an aggregate amount of approximately $8 million. … We expect this acquisition to drive significant cost and revenue synergies over the next two to three fiscal years, which we estimate will ultimately exceed $30 million in the aggregate (an amount that includes the approximately $8 million of synergies realized as of June 30, 2015).”

Surgery Partners also acquired NovaMed, Inc. in 2011. That acquisition led to a $5.2 million reduction in expenses and generated $9.3 million in incremental revenue.

3) The right sector. Healthcare is outperforming the S&P 500 Index this year. It’s up 2.9 percent YTD vs. -2.92 percent for the S&P. Biotech’s taken a pounding recently, but healthcare staples like AMN Healthcare Services, Inc. (AHS), whic offers healthcare workforce solutions and staffing services to healthcare facilities, have performed better.

3 reasons NOT to invest in the Surgery Partners (SGRY) IPO

1) Gobs of debt. Between Surgery Partners’ two business units – Surgery Center Holdings and Symbion – the company’s holding nearly $1.8 billion in long-term debt. That’s greater than the combined revenues of both entities.

2) Thin margins. In the past few years, Surgery Partners has largely been operating in the red. That’s thanks to its acquisitions, but it’s also due to fierce competition in the healthcare space. Surgery Center Holdings “more than doubled revenue from 2011 to 2014, exceeding $400 million,” per Fool.com. “But across that stretch it was positive on the bottom line only once, and posted an attributable net loss of $66 million last year. As for Symbion, in its last stand-alone fiscal year (2013) its revenue grew by 9% annually (to $536 million), but attributable net loss dipped to almost $13 million.”

Fool.com points out one of Surgery Partners’ competitors, AmSurg (NASDAQ:AMSG), demonstrated a similar pattern over past few years: substantial revenue growth and very thin top-line growth.

3) Regulatory risk. Government regulations are increasingly worrisome for healthcare companies – a risk Surgery Partners is well aware of. “The amount that we receive in payment for our services may be adversely affected by market and cost factors that we do not control, including Medicare, Medicaid and state regulation changes, cost containment decisions and changes in reimbursement schedules of payors, legislative changes, refinements to the Medicare Ambulatory Surgery Center payment system and refinements made by CMS to Medicare’s reimbursement policies. For instance, cuts to the federal budget caused a 2.0% reduction in Medicare provider payments in 2013.”

DISCLOSURE: I do not have a position in SGRY, and I do not plan to initiate one in the next 72 hours.

Photo credit: Adam Ciesielski

3 reasons Marc Faber believes the stock market is doomed

In a recent interview with Christopher Menon, Marc Faber predicts we could see a dramatic sell-off in stocks (around the magnitude of 20-30%) that could begin in the coming months. His credentials? Apparently, he correctly predicted the 1987 stock market crash. Why does he think we’re doomed to repeat that fate? Three reasons:

1) 12-month new highs have diminished.

2) Volume is slack. When volume is high, it’s on days when the market is going down.

3) Sentiment is too one-sidedly bullish.

Faber believes investors can protect themselves by moving into precious metals, specifically physical gold bullion. My favorite part of the interview comes when Menon asks if Faber believes gold could rise to $10,000 or more. Faber’s response? “You’d better ask this question to Ms Yellen and to other central bankers, it all depends on how much money they will print.”

Adventure Gold Inc. (PINK:AGONF, CVE:AGE) stock forecast

Adventure Gold Inc. holds rights to more than two dozen potential gold properties in the Abitibi Greenstone Belt located in north-western Quebec and north-eastern Ontario.

This post is part of series where we’re checking in on the Top 500 junior gold and silver mining stocks profiled in our book Top 500 Gold and Silver Mining Stocks: Metalproofing Your Portfolio from the Coming Inflation Shock.

Performance: First, let’s compare Adventure Gold’s performance against the AMEX Gold Bugs Index (HUI) – a basket of industry-leading gold stocks.

Time Span AGONF Performance HUI Performance
1 Month +61% +13%
3 Month +44% +3%
YTD -15% -12%

Adventure Gold’s following the usual trend: it’s more volatile than larger equities. When times are good, they’re really good for small cap miners. When times are bad, the declines are steeper. Still, AGONF’s performance over the past three months has been particularly impressive.

Profile: Adventure Gold Inc. holds rights to more than two dozen potential gold properties in the Abitibi Greenstone Belt located in north-western Quebec and north-eastern Ontario. The company plans to spend $14 million on exploration over the next five years. Most recently, Phase 2 drilling has begun on the Lapaska Property in Quebec. Highlights from previous drilling there showed 1.0 g/t gold over 103.4m including 10.3 g/t gold over 3.8m. http://www.adventure-gold.com/

Risks: Volume on AGONF is extremely low. Some days no shares trade hands. That means that even if you want to sell your shares, there might not be a buyer out there. If there is a buyer, they probably want a discount to the current quote. Volume currently averages 2,500 shares per day.

Recent News: Phase III drilling has kicked off on the company’s 100%-owned Pascalis-Colombiere gold property in the Val-d’Or mining camp in Quebec. The most promising hole showed 3.1 g/t Au over 27.0 metres. Click for more drilling results. Pascalis-Colombiere is a proven property. It yielded just over 200,000 ounces of gold for Cambior Inc. (now IAMGOLD) between 1989 and 1993. That’s a plus over more speculative explorers with unproven plots of land.

Adventure Gold had $5 million on hand as of April, and they have partnerships with two major mining companies in Agnico Eagle (Dubuisson in Val d’Or) and Lake Shore Gold and RT Minerals (Meunier-144 in Timmins West). They’re planning $2 million in drilling through next April with additional work commitments of $10 million over the next 5 years. Promising results would be a boon to the company’s shares.

Check out our book Top 500 Gold and Silver Mining Stocks: Metalproofing Your Portfolio from the Coming Inflation Shock (pictured above) to uncover more undiscovered gold and silver mining stocks.

Tesla stock forecast for 2011+; How about $50 per share? (TSLA)

If Tesla (TSLA) shares hit $50, that would be a gain of 100 percent or 33 percent a year through 2014.

Investors are “substantially underrating Tesla’s potential,” according to JPMorgan analyst Himanshu Patel. Patel’s proclaimation in a research note on Monday sent shares in Tesla Motors, Inc. (NASDAQ:TSLA) soaring, and the stock’s up 7.4 percent on the week.

Patel expects Tesla’s shares to hit $40 to $50 in the next three years as the company expands its offerings. If shares hit $50, that would be a gain of 100 percent or 33 percent a year through 2014. Expect then to see Tesla’s stock around $33 by the end of 2011. Patel’s particularly bullish on Tesla since the company has a lower cost structure than its peers, and it should have substantially higher operating margins.

Indeed, Patel estimates operating margins could be as high as 9 percent. That would put it on par with German luxury car makers, Reuters reports. To keep costs down, Tesla plans to use a common platform and common powertrain between all of its future offerings including the Model S sedan and the Model X SUV.

The Model S sedan should debut in the middle of next year, and we’ll get our first glimpse of Tesla’s hush-hush Model X SUV in Q3 of this year. The SUV won’t be on the market until 2013, but it will likely benefit from the R+D that’s went into the Toyota-Tesla RAV 4 electric SUV. Up after that? Tesla has plans to roll out a low-cost, sub-$30,000 EV. Throw in a few more of the unexpected partnerships that Tesla seems to be good at landing, and I expect a lot of investors will be wishing they’d bought Tesla shares at $25.

Related

10 things you should know before you short a stock

Here are 10 things you must know before you short a stock. Shorting is subject to tax implications, brokerage rules and the potential for big losses. Cover your bases before you start shorting stocks, and you’ll be much happier in the long run.

This post is part of an investment series on shorting stocks titled 100 tips on how to short sell stocks.

1. Gains from short sales are taxed as ordinary income. To limit your exposure to short sale taxes, only short stocks in a tax-sheltered account or short stocks you expect to hold for a relatively long time.

2. Avoid shorting stocks in companies that are high in assets – even if they’re straddled with debt. Companies that have lots of debt and lots of assets are ripe for takeovers. Even the rumor of a takeover can push a stock up 20 percent or more in value overnight, and that could crush your short position.

3. Leave plenty of cushion in your account so that you can absorb temporary run-ups in price. Even if you’ve found a dog in the market, that dog could still take some dead cat bounces. Never risk more than 25 percent of your portfolio on a short. If the stock shoots up, you want to hold through that rise in price, so that you can watch your short position settle where it’s supposed to: near zero.

4. Short selling is subject to different margin requirements than going long on stocks. Carefully read your broker’s requirements on short margin as this could lead to the premature liquidation of your position.

5. Short selling can lead to more than 100 percent in losses (meaning you just might end up owing your broker money). Let’s say you’ve decided shorting a company with shares trading at $5 per share. If that company starts putting together a lot of big wins and the share price shoots up to $30, you’re out more than 600 percent! The moral? Have tangible reasons before you short a stock.

6. You can’t just short shares in any company. Your broker might not have the inventory to support a short position. That means all your research has went to waste. Study companies with trading volumes over 100,000 shares per day to focus your research on the companies you’ll most likely be able to short.

7. You can’t short stocks without a margin account. If you can’t trade on margin in your brokerage account, you won’t be able to short stocks. Contact your broker to apply to upgrade your account if you don’t have a margin account.

8. Short positions can lead to large losses in short periods of time. A so-called “short squeeze” happens when a stock that’s heavily shorted starts climbing. Many of the short investors who don’t have the cushion in their accounts to absorb the climb are forced to cover their shorts. This “squeeze” pushes the stock’s price up even higher.

9. Shorting a stock that pays dividends means you’re responsible for paying the dividends to the owner of the shares. You’ll receive a dividend if you’re shorting a stock when the dividend is paid, but, in turn, you’ll owe at the money to the owner of the stock who expects the dividend. This money may or may not appear temporarily appear in your trading account.

10. Put options can act as shorts. If you’re convinced the share price in a particular company will fall, you can buy a put option that gives you the right but not the obligation to sell shares in the future at a discount to the current price (so long as the value of the stock actually falls).

Shorting shares can lead to significant profits, but it can also lead to enormous losses. Be sure you fully understand the implications of shorting before you start, and make every effort to learn as much about the companies that you’re shorting as you possibly can. The more you know, the better you can protect yourself from losses, which is, after all, your No. 1 goal as an investor. You’re in it to make money, not lose money.

This post is part of an investment series on shorting stocks titled 100 tips on how to short sell stocks. Click for more tips and tricks on shorting stocks.

10 secrets to finding stocks to short

Here are 10 secrets to finding stocks to short. Shorting stocks is the art of getting ahead of irrational investors, and if you watch carefully for the signs, you should be able to do like any other investor on Wall Street.

This post is part of an investment series on shorting stocks titled 100 tips on how to short sell stocks.

1. Seek out stocks that have no intrinsic value. A stock with a $10 million market cap and $20 million in debt, for instance, or a company that’s at a competitive disadvantage in a crowded marketplace. Either would be a great stock to short.

2. Wait for a trigger that’s going to push share prices down before you short a stock. If you’re confident an overvalued stock is going to have a disappointing earnings report, wait until that report comes out and sell shares short. If strong companies in the same sector are reporting poor earnings, expect the weaker companies to report poor earnings, too, and short before the earnings release.

3. Good at reading balance sheets? Find the accounting tricks that are artificially propping up a stock. A great example of this are financial stocks that have been able to mark-to-market essentially worthless assets. Two years ago, the banks’ balance sheets looked a lot worse than they do today, but not a whole lot has changed. If the economy tanks, those accounting tricks won’t hold water.

4. Look for companies with mounting inventories. If a company’s stock-piling their wares, that means there aren’t any buyers out there. A company just can’t keep making products no one buys. Eventually, it’ll lead to price reductions, lowered margins and declining earnings. Going short before the broader market recognizes the troubles at a company are the key to locking in big profits.

5. Keep an eye out for insider sales. Inside sales are a normal part of business. If a high-level director at the company needs cash to finance a trip to Belize, he’s justified in selling some company stock. On the other hand, large, million-dollar plus sales don’t happen every day. And if there’s one thing an executive doesn’t like, it’s losing money. If they expect their company’s shares to keep going up, they’re not going to sell. They’ll be begging their uncle for a loan before they do that.

6. Seek out companies with shriveling or negative free cash flows. Companies that have taken on significant acquisition costs or R&D expenses will have lower earnings in the future. If their business model can’t support the research or acquisition, they just might not be able to climb out of the hole, and you can climb right in and make some money.

7. Short stocks in companies with obfuscated 10-Ks or 10-Qs. If a company’s struggling to keep their profits looking good, they’re going to have to come up with some nifty accounting tricks to do it. That means lots more paperwork when they file their annual reports. If you notice substantial increases in page-counts, read the fine print carefully.

8. Low-volume is your friend. If a stock’s moving up or trading sideways on low volume, investors are likely growing complacent or weary of a company. Don’t short a stock that’s climbing on high volume. You could be out of buying power faster than a fresh college grad.

9. If you’re good at shorting stocks, you can make money going long. Have a good track record of selling short? Then, you’re great at identifying when a stock is overbought. On the flip side, that means you can probably tell when a stock’s oversold. Try going long if you’ve had lots of success selling short. Just look for all the signs you avoid when you usually short a stock.

10. Short stocks that have investors in a tizzy (just make sure you wait until the party’s over). Often, a small-cap stock will release news of a huge sale that pushes a stock price up 20 percent or more. If you read the underlying news, though, the fundamentals just aren’t there. It’s not unusual to see share prices pushed up beyond values that the news justifies. For example, if a small-cap stock announces $10 million in new sales, that shouldn’t justify an intraday climb of 20 percent in market cap.

The moral? Shorting stocks is the art of getting ahead of irrational investors. If you watch carefully for the signs, you should be able to successfully short overbought stocks.

This post is part of an investment series on shorting stocks titled 100 tips on how to short sell stocks.