Healthcare IT from the Investor’s Chair 6/2/11

Ask the Chair

 

My broker has found nothing other than the usual suspects and none of them are rated all that good. Would be interesting to have your investment banker dude weigh in on investing in a fund or a reasonable combination of individual stocks, with no promises or guarantees, of course.

I’m guessing that would be me, as both a former analyst-dude and I-banker dude. 

Here’s my view. While I used to make my living recommending stocks, I’ve come to the conclusion that buying individual stocks is nearly an impossible game to win. Why? There’s a theory known as Market Efficiency, which basically postulates that all information known about a company and its prospects is already reflected in its share price.

Now clearly the readers of this blog know more about this sector than the average stock market participant (and are probably better looking and more fun to party with), but we’re talking about the market as a whole, ranging from little old ladies’ investment clubs to the likes of Raj Rajaratnam (the Galleon hedge fund owner recently convicted of insider trading).

As readers of my debut column will recall, buy-side and sell-side analysts spend their time scouring for “market inefficiencies.” In other words, seeking out stocks that don’t fully reflect their value. They do this by attending HIMSS; reading financial statements; talking to users, consultants and company management teams; and other forms of fundamental research.

Now clearly these market inefficiencies do happen for a number of reasons. Sectors go in and out of favor, companies miss (or exceed) their Street forecasts and are over-penalized (rewarded) as a result, or you just might really believe in what a company you use or saw at HIMSS is doing and so want to bet on them. (The key word here is “bet,” so please behave accordingly.)

Now that I’m done flaming about market efficiency (there’s no zealot like a convert), here’s what I do:

• First, my personal investment strategy is based around a core and diversified portfolio of low-cost index funds. That said, sometimes I just can’t help myself. That’s what a “satellite account” is for. If you want to “play” the market (again, notice the word we use), consider allocating 10-15% for that purpose. Mine is in my IRA so I don’t have tax consequences to worry about.
• Next, do your homework. You presumably have an investment thesis beyond just wanting to own HCIT stocks (e.g., love Cerner / athenahealth / Allscripts’ product at my hospital / medical group; Jonathan Bush has a great sense of humor; I use ePocrates every day; etc.)
• Watch the stocks you’re interested in and look at their valuations relative to other sectors, each other, and their history. I’ll note that these stocks have had a great run over the past few years and, in my view, the easy money might have already been made.
• If you can, try to obtain some analyst reports. At the very least, check the company’s SEC filings.
• If you determine that there’s a good buying opportunity, for whatever reason, place your trade and hope for the best! I’ve traded these stocks for my own account a few times, with generally good, but occasionally horrid results – your mileage may vary!

If you’re bullish on the entire sector, one idea might be to divide your HCIT portfolio across a number of stocks to diversify away some of the company-specific risk. As I used to say to portfolio managers who asked me to choose between two different competitors: remember, you’re not selecting the best system for your facility / practice, you’re buying pieces of paper that trade. There’s no reason you have to pick just one.

That diversification reduces risk is something even most economists agree on (though there’s the counter-view: “no guts, no glory”). Just don’t put next month’s mortgage payment or your kid’s college tuition into these stocks — they’re volatile at best! As an aside, the best book on investing I’ve ever read is A Random Walk Down Wall Street, by Burton Malkiel.

Did you attend the Health Evolution Partners’ Leadership Summit? What was it like?

For the second year, I was invited to attend this event in Dana Point, CA. While the conference began years ago as a Versant Ventures event, Health Evolution Partners took it over a few years ago. HEP is a billion-dollar private equity fund focused on healthcare, with CalPERS as its lead investor. As readers of this blog likely recall, the fund’s chairman is David Brailer, MD, PhD, the first “Healthcare IT Czar.”

(In the interest of disclosure, I should mention that I’ve known the good doctor since he was the T.A. in a class I took at Wharton while he as earning his PhD over 20 years ago. He’s been a friend and supporter ever since.)

I view this as one of the best work-related events I attend each year. As Dr. B said in his opening remarks, he asked his staff to find the best one hundred minds in healthcare, and about 400 showed up. The event included a number of panels on topics ranging from the future of for-profit hospitals to innovations in primary care, the emerging super-consumer, personalized medicine, risk-bearing medical groups, and more.

The speakers ranged from such luminaries as Michael Dell and Todd Park (athenahealth co-founder, now CTO of HHS) to CEOs of corporations of varying sizes to policy wonks and, truthfully, ranged a bit in quality (as is ever the case). I’d give them a B+ (as high as I ever grade panel events, btw).

Beyond the panels, however, were several other aspects of the event that made it extremely worthwhile. Friday afternoon had two noteworthy components. First, was “strategy sessions,” where senior executives from companies ranging from Kaiser and Optum (fka Ingenix) to Pfizer and Oracle shared their visions and strategies in a small, boardroom-type setting. This was the first time I’d heard the Optum viewpoint and strategy actually expressed, and I walked out nodding my head in agreement with much of it (though the devil and valuations are clearly in the details).

Finally, the event concluded with a round of “speed dating,” where a number of innovative companies were given short sessions with a range of sponsors, including large vendors, health systems, and funders. In effect, HEP is trying to use this “Innovation Network” to bring the smaller (often more creative) companies together with the execs of the larger (always better capitalized) companies to find some areas of potential common interest and, hopefully, accelerate the pace of progress.

As an observer, it appeared to be an outstanding opportunity for both sides, though I do wish there’d been a way for people in neither group (such as this author) to participate.

Best of all, the quality of the attendees and the networking events were simply outstanding, really the best of its sort I attend. There was a great deal of card swapping, as well as reconnecting going on. A highlight for me was a casual introduction I made between two ST Advisors’ clients and learning that one was on the board of a hospital which was in need of the type of solution the other’s company provided! That kind of serendipity can’t be beat. I’m already looking forward to next year.

Ben Rooks is the founder of ST Advisors, a consultancy which has worked with dozens of HCIT companies and investors typically on issues around strategy, financing, and outcomes/exit planning. He enjoys food and wine, debating market efficiency, discussing healthcare, and most especially, reader comments!