A first mover into a new frontier for the healthcare industry
Healthcare is an essential necessity for any individual. So, in recessionary periods, healthcare expenditures tend to swing less wildly than discretionary spending.
Although healthcare is traditionally a physical experience, with associated companies managing drugs and supplies, there has been a renewed push to bring the process online.
In this space, Teladoc Health (TDOC) holds a dominant position.
While investors may be initially wary of its precipitous drop in stock price, the company is still very profitable, and it’s growing like gangbusters.
And nowadays, since the stock is down 92% from all-time highs, its valuations are much more attractive.
That’s why it’s a great candidate for FA Alpha 50.
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As much as investors try to suppress emotion, it’s a rare investor that can entirely forego their emotional response to swings in the stock market.
That’s why a stock like Zoom (ZM) surged as much as 730% during the pandemic when every company and person made an account and started holding virtual meetings.
These emotional swings cut both ways, though. Since peaking in October 2020, once the hype and FOMO (fear of missing out) died down, investors sold the stock off just as aggressively as they bought in.
The stock is down 87% from those record highs. Sometimes the best investment opportunities are when the hype completely dies down for a previously hot stock.
It’s unlikely all the initial hype was unfounded, but investors are quick to forget. That might be the case for another early pandemic winner, the at-home health company Teladoc Health (TDOC).
As a first-mover in the telehealth market, Teladoc Health has a unique opportunity to fundamentally shift how healthcare access is presented and consumed. It is up to the firm to capitalize on these gains and build a sustainable business model.
Teladoc Health provides patients with remote access to healthcare services, including consultations with licensed physicians and mental health professionals through its digital platform.
Patients can access their platform through a web browser or mobile application and connect with a provider through video or audio calls. Teladoc Health’s platform also includes features such as electronic medical records, medication management, and integration with other healthcare providers.
While Teladoc Health benefited greatly from pandemic lockdowns, it is riding a trend in the healthcare industry that will outlive that crisis.
The pandemic benefited the company, but it is attempting to reshape itself to be profitable long-term and capitalize on the growth it achieved during that period.
Its Uniform return on assets (“ROA”) rose immensely from just below -1% in 2019 to above 33% in 2020. Although returns slumped slightly the year after, the firm has managed to recover profitability this year with a slightly lower than 33% ROA.
While it’s possible to write off the high ROA in 2020 thanks to the pandemic and all associated factors, the fact that Teladoc returned to that profitability in 2022 shows that there is a future path to profitability.
While investors may be worried about ROA, Teladoc Health is still a growing company, and it’s important to look at the growth of the company as opposed to ROA in isolation.
Additionally, we need to understand what the market thinks about the company to be able to say if there could be upside opportunities.
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 around $25 per share, the market expects the company’s ROA to drop below 12%.
While a lower expected ROA is understandable, thanks to a few standout years, it is still dramatically below what Teladoc generated as a median estimate and looks over-pessimistic considering the asset-light nature of the business.
Notable, these expectations are based on extremely low growth expectations of 12% per year, lower than any other year on record for Teladoc Health and contrary to their strategy of growing to expand their market penetration.
Even if the company were to grow at its worst historical rate of around 35%, thanks to a slowing environment, combined with a median ROA of around 12%-13%, there is significant upside for the firm.
That is why Teladoc Health is a great FA Alpha 50 name. Its high and sustainable ROA and first-mover niche positioning make it interesting.
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.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research