This article is part of our Rising Star Portfolios Series.
Today, I picked up shares of Sabra Health Care REIT (Nasdaq: SBRA ) for my Rising Star Portfolio. It's a growing small cap focused on leasing health-care facilities but now leases exclusively to former parent Sun Healthcare (Nasdaq: SUNHD ) . You can read a full write-up here.
Now, the former parent is trading at just 7 times trailing earnings, so it looks like it may be a good value. However, Sun has several risks and may end up being a value trap. Here's one major risk:
Sun derives 70% of its revenue from Medicare and Medicaid. Many states have frozen or reduced Medicaid payments, and some have even considered, at a preliminary level, to drop the program entirely. In addition, Medicare has reclassified some health-care treatments so that they are less profitable and altered other payments, making them less lucrative for operators such as Sun. In response, the company plans on moving upmarket, as it were, treating the more acute cases that receive greater Medicare funding. Still, it remains to be seen how health-care reform will work out for Sun, but I'll be keeping my eye on it.
Given these potential potholes, I opted for Sabra because its revenue stands at one removed from Sun's revenue, and the REIT has Sun locked into 10- and 15-year contracts. Sabra still offers the potential for growth, as I argue here, and should pay out a nice dividend when it officially converts to REIT status early next year.
Do you any other major risks with Sun or Sabra? Join me on my Rising Star message board, and we'll chat.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).