According to the latest available SEC filings, five different billionaire-run hedge funds unloaded nearly 1.2 million shares of healthcare REIT HCP (NYSE:HCP) during the second quarter. And while I never encourage investors to blindly follow the actions of billionaires, it does compel me to re-examine my original investing thesis.
HCP's recent history
HCP has had an interesting 2016 so far. After posting a surprising loss in the fourth quarter of 2015 caused by its troubled HCR ManorCare portfolio, the stock plummeted to a multiyear low. Since then, HCP has produced two solid quarters, and has announced a spinoff of the troubled assets into a newly created REIT (which will be known as QCP) in order to maximize the potential of both the remaining portfolio and the spun-off assets.
It would be silly to speculate on the reasons that the aforementioned hedge funds unloaded their HCP shares, but here are some reasons investors might want to sell, as well as some reasons HCP still looks attractive.
Reasons to sell HCP
There are several potential reasons investors might want to sell a given stock, but here are two big ones that apply to HCP right now.
- Recent price gains: Since bottoming out in February, HCP shares have rebounded and more. In fact, HCP has gained more than 52% in the six months since the HCR ManorCare loss was reported. While a short-term price move shouldn't be the primary reason for selling a stock, this kind of gain is tough to ignore and can be tempting.
- Uncertainty: The spinoff could be a great thing for HCP over the long run, but it does create some uncertainty in the near term. The dividend policy is one area we're not sure about; HCP has increased its dividend for 26 straight years, but it's unclear whether that will continue post-spinoff.
In short, the combination of a big short-term profit and the possibility of growing pains ahead as the companies discover their independent identities is certainly a valid reason to sell, especially if your top priority is a consistent stream of income from your investments.
Reasons to buy HCP
Even after the gains of the past six months, there are a few reasons investors may want to consider HCP for their long-term portfolio.
- Benefits of the spinoff: I've written before about the reasoning behind the spinoff, so check out this article for a through discussion. In a nutshell, separating the company's assets could allow for more consistency and greater financial flexibility in the remaining HCP portfolio, while allowing QCP's management more flexibility to maximize the value of those assets.
- Strong long-term industry trends: The U.S. population is aging fast. In fact, the 75-plus age group is expected to roughly double in size by 2050, which should create steadily growing demand for healthcare facilities. In addition, healthcare costs have been rising at a faster rate than inflation, and the healthcare real estate industry is highly fragmented.
- It's still cheap: HCP trades for just 13.9 times the midpoint of its 2016 funds from operations (FFO) guidance. Compared with other industry heavyweights Welltower (NYSE:HCN) and Ventas (NYSE:VTR) with P/FFO multiples of 16.9 and 18.1, respectively, HCP looks rather cheap, even after the recent gains.
The Foolish bottom line
Obviously, HCP isn't as compelling of a bargain as it was in February. And, the pending spinoff certainly does create some uncertainty going forward, both in terms of dividends and growth potential.
However, I believe that the spinoff is the right move for HCP, and will allow the company to continue its history of producing excellent income and total returns for shareholders. And, the company's low valuation helps to make up for any uncertainty. In the interest of full disclosure, HCP is a cornerstone of my own retirement portfolio, and I have no plans to change that. At just 13.9 times 2016's expected FFO, it's still looking like a good time to add HCP to your portfolio, despite what some hedge funds have done.
Matthew Frankel owns shares of HCP and Welltower. The Motley Fool recommends Welltower. 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.