Here's Why I Haven't Purchased This Stock

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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).

Jim Royal, Ph.D., does not own shares in any company mentioned here. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On December 01, 2010, at 3:53 AM, DeborahCalvert wrote:

    Another risk Sabra has is in the wrongful death lawsuits being filed against them. In the case against them for the death of my mother, Evelyn Calvert, I also witnessed four other deaths from their neglect. The CEO and Risk Manager both violated a 2001 California State Injunction with known broken equipment (HVAC system, b/p monitors and suction equipment), and under staffed knowing it was causing harm. Sun settled with the DOJ for $2.5 M in Sept 2005, months before the evidence in my case was presented to the courts in June, 2006, and cheated me out of wrongful death and her pain & suffering -they're corrupt.

    Read Sun's Medical Director's testimony at

  • Report this Comment On December 01, 2010, at 7:17 AM, eulav wrote:

    Its wise to be sleptical but did you see SKH's results announced on 11/1/10 (in the same biz as SUNHD and see how the stock performed since the release)? Here is an excerpt:

    Raising Guidance

    Skilled Healthcare Group is raising its 2010 full year guidance, excluding the impact of the $53.5 million litigation charge incurred in the third quarter of 2010. The Company expects revenue to be between $805 million and $812 million. Adjusted EBITDAR is expected to be in the range of $135 million to $139 million and Adjusted EBITDA is expected to be in the range of $116 million to $120 million. Diluted adjusted net income per common share is expected to be between $0.92 and $0.97. This Adjusted EBITDAR, EBITDA and net income guidance excludes non-recurring items reported for the nine-month period ended September 30, 2010 as referenced in the following Adjusted Net Income Reconciliation table comprised of the aforementioned litigation charge. Additionally, this guidance assumes the following:

    •Fiscal year 2011 Medicare rates along with the impact of RUGs IV and the elimination of concurrent therapy are, combined, expected to be better than budget neutral.

    •No change in aggregate Medicaid rates.

    •Average interest rate on debt of approximately 8 percent and dilution from new term loan and revolver refinancing of approximately $0.08 due to increased interest expense.

    •2010 capital expenditures of approximately $26 million.

    •An effective tax rate of 38 percent.

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