Should You Follow Warren Buffett Into DaVita?

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Legendary investor Warren Buffett has increased his bet on the kidney dialysis firm DaVita (NYSE: DVA  ) . Buffett's firm Berkshire Hathaway (NYSE: BRK-B) now owns almost 36.5 million shares with a whooping value of $2.2 billion . In total, Berkshire owns more than 17% of the firm.

This summer, shares of DaVita had fallen on concerns over the rate of reimbursement that would be afforded to kidney dialysis by Medicare . There was pressure to lower the rate of reimbursement for Amgen's Epogen, the most expensive component of DaVita's kidney dialysis treatment. Indeed, a 9.4% lower reimbursement rate would hurt DaVita's margins, and Wall Street responded by sending the stock lower.

What has changed in DaVita's business model?
Recently, DaVita stock has resumed its winning ways nearing its annual high price of around $62. During this time, it appears that the controversy regarding DaVita's reimbursement rate may blow over. The company flexed its lobbyists' muscles in order to fight the reduced reimbursement. Then news broke in November that Medicare would not lower the reimbursement rate for Epogen. . As is often the case, a false bearish thesis held the stock down, however, when the threat of a lower reimbursement was removed the stock was free to rally yet again. With the stock still 5% below all-time highs and the market up 7% since July, DaVita most likely has room to run in the short term.

What does Warren Buffett see? 
The longer-term bullish case on DaVita comes from the unfortunate trend of higher chronic kidney disease that in large part stems from higher rates of diabetes. This trend is likely to increase, due to the prevalence of diabetes among older Americans. According to the National Institutes of Health 3.7% of persons aged 20-44 suffers from diabetes, while a whooping 26.9% of persons 65 and older have the condition.

DaVita is a leading provider of U.S. dialysis and related services for patients suffering from renal disease. DaVita currently services 153,000 patients at 1,954 outpatient facilities nationwide. The issue with reimbursement is very real as 80% of DaVita's revenue comes from the Medicare system, with patients paying the other 20%. Medicare rate cuts have occurred in the past, in 2011 DaVita took a one-time 3.7% rate cut and the stock was not severely affected, adding further credence to the bullish case. 

The Census Bureau further estimates that from 2010 to 2050 the United States is expected to experience a rapid growth in the older population with persons aged 65 and over more than doubling over this time frame. Indeed, over the long term Buffett's investment in kidney dialysis is likely a very shrewd one as the population needing kidney dialysis is likely to increase substantially.

Even though it feels like cheating, looking over the shoulder of a legendary investor can often result in rewarding purchases. In school, one might receive detention for copying a better student's answers, but in investing you will probably learn and achieve good returns. Investors who wish to "ride Warren's coattails" will most likely be happy with the results.

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Related Tickers

9/28/2016 4:02 PM
DVA $66.21 Down -0.12 -0.18%
DaVita CAPS Rating: *****
BRK-B $145.28 Down -0.06 -0.04%
Berkshire Hathaway… CAPS Rating: *****