Investor Essentials Daily

This company is set to gain as healthcare spending increases

January 16, 2024

The U.S. is currently experiencing a notable surge in healthcare spending. This trend is largely driven by an aging population, rapid advancements in medical technology, and steadily increasing healthcare service costs.

The rise in spending is indicative of the country’s ongoing efforts to improve healthcare quality and accessibility, catering to the evolving needs of its diverse population.

As medical technology continues to advance, it introduces revolutionary treatments and diagnostics, though these come with higher costs.

Additionally, the demographic shift towards an older population necessitates greater spending to ensure comprehensive healthcare coverage and support.

R1 RCM (RCM) finds a crucial role in this landscape. With their expertise in efficiently managing healthcare finances, the company is well-positioned to benefit from this trend.

R1 RCM’s role in handling complex billing and insurance processes is becoming increasingly important as healthcare spending continues to rise.

Thus, R1 RCM showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

Investor Essentials Daily:
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Healthcare spending in the United States has surged impressively, with figures reaching over $4.3 trillion in 2023.

This rise in spending is opening up new opportunities for specialized companies that handle the complex financial side of healthcare services.

Among these, R1 RCM (RCM) stands out. The company excels in offering technology-driven solutions that optimize the patient experience and the financial performance of healthcare facilities.

Their expertise lies in efficiently navigating through the complexities of patient registration, billing, and insurance processing, tasks that have become increasingly vital as healthcare costs continue to rise.

The strategic acquisition of Cloudmed in 2022 has been a game-changer for R1 RCM, marking a significant expansion of its capabilities.

Cloudmed brings to the table advanced artificial intelligence and machine learning technologies, specializing in enhancing revenue integrity for healthcare providers.

This integration enables R1 RCM to deliver more comprehensive financial management solutions, which are critical in streamlining operations and maximizing revenues.

Yet even before the acquisition, the company has consistently demonstrated strong performance over the last four years, with Uniform Return on Assets (“ROA”) above 40% and asset growth of more than 25%, showing its robust operational success and market expansion.

As spending in healthcare increases and the company continues on its strategic investments, R1 RCM is well-positioned to see further equity upside.

However, the market fails to recognize this opportunity.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market seems to predict that the company’s Uniform ROA will fall to 25%, the historically lower end of the spectrum.

With healthcare spending on the rise and R1 RCM’s key role in healthcare finance, it looks like the market might not fully appreciate the company’s prospects.

The company has a solid opportunity to grow its business and keep pace with the increasing demand for healthcare management, remaining a significant player in this field.

That is why R1 RCM showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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