Signify Health (SGFY) has been a scorching-hot stock of late. On Monday, its shares jumped by 32% as rumors spread that multiple companies are looking to acquire it. No official word has come out yet, but many traders appear to be assuming that a buyout of Signify is all but certain.
In the wake of that rally, is it too late for investors to buy the stock, or is there more potential upside worth pursuing?
Is an acquisition inevitable?
Signify Health works with providers of Medicare Advantage plans and offers in-home health evaluations that assess whether individuals are receiving value-based care. Its services can help healthcare companies keep their costs down and their operations efficient.
The company went public in February 2021, and the stock has struggled ever since. Though it has been on an upswing for the past couple of months, its current share price in the $27 to $28 range is well below the high of over $40 that it hit back in its first month of trading.
A Bloomberg article citing "people with knowledge of the matter" reported that multiple companies are interested in buying the business -- among them, big names such as UnitedHealth Group, CVS Health, and even Amazon, which recently announced plans to acquire primary care company One Medical. Similarly, an article in The Wall Street Journal quoted "people familiar with the matter" saying that a buyout deal could value Signify at more than $8 billion. And -- surprise, surprise -- the stock has now been bid up to a level that gives Signify a market cap of just over $8 billion. Investors are clearly pricing in an acquisition at that estimated price.
Given the many high-profile bidders allegedly involved, it seems likely that a deal will take place. It's just a matter of which suitor will win, and at what price.
Signify's elevated valuation has made it a riskier buy
The big problem for those considering buying shares now is that at a market cap of $8 billion, Signify is already trading at around the level that informed individuals are projecting its purchase price will be. Unless a more energetic bidding war ensues, the stock may not reach a higher valuation than it already has.
Investors who buy the stock from here are effectively speculating on a higher than expected purchase price. That's certainly a possibility, but there's also the risk that the winning bid will be below that estimate, which could result in losses for speculators who came late to the stock.
Its fundamentals are sound, but not overly impressive
Signify Health does have a promising, growing business. This year, the company projects that its home and community services business (its core operations), will generate between $800 million and $810 million in revenue. That would represent a year-over-year growth rate of 23% from the $653.1 million it reported from that segment a year ago. The company is also winding down its smaller, episodes of care segment, which last year accounted for about 16% of total revenue (the home and community unit made up the rest), in order to focus more on its long-term growth.
And as for profitability, the company's operating margin has been steady but it doesn't leave a big buffer should expenses rise:
SGFY Operating Margin (Quarterly) data by YCharts
Signify's business looks good but it doesn't jump out as an overly attractive buy; its growth rate isn't bad but it has been slowing down, and its margins could be better. Overall, it's a decent stock, but I wouldn't buy it at its current valuation.
Investors are better off looking at other growth stocks to buy
There's minimal incentive to buy Signify's stock now. It's trading at a high valuation of more than 35 times its one-year forward profit estimate. (The average healthcare stock averages a multiple of just 16 -- which is probably where Signify belongs.)
Acquisitions can be exciting, but once a deal price is set, there won't be much movement in the stock. With many growth stocks trading at reduced valuations, investors would be better off pursuing options other than Signify.
