Healthcare

Report by Hedgeye

2025 mirage sets up 2026 disaster - slowing volume trends, accelerating labour costs and mounting policy headwinds are converging into a “perfect storm”. While 4Q25 may appear resilient due to pull-forward utilisation ahead of Jan 1st plan resets, Hedgeye expects brutal comps in 1Q26. They contend that Medicaid supplemental payments and unusually low uninsured volumes (due to immigration enforcement) flattered 2025 margins - tailwinds that are likely to reverse in 2026. With employer premium inflation at a 20-year high (+6.1% in Q3), insured lives are set to shrink just as labour costs accelerate amid unsustainably low SG&A ratios, driving significant margin pressure. Additional policy headwinds under the Trump Administration are working to shrink the population of insured medical consumers, amplifying the pressure already seen.

Report by Two Rivers Analytics

Two Rivers’ model seeks companies that are potentially “over-earning” - defined as companies with unusually high margins relative to their own history or relative to the industry. Provides fertile hunting ground for shorts if the reasons for the margin increase are either unsustainable or fraudulent. The best short candidates include:

BKE - No sales growth pre-Covid. Gross margins have since risen from 40% to 48% and EBITDA margins from 14% to 25%.
HCA - Incremental gross margins have reached 40% vs. sub-20% GAAP. Trades at record high EV/S and EBITDA multiples.
OMI - Stock trades based on the continuation of very high margins. Insiders are suddenly and sharply selling off shares.