Is Encompass Health (EHC) A Smart Long-Term Buy?

·3 min read

Madison Funds, an investment management firm, published its “Madison Small Cap Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. The Madison Small Cap Fund Class Y declined 4.70%, slightly underperforming the Russell 2000 by 34 basis points (bps) for the third quarter of 2021, while the Russell 2000 index was down 4.36% for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Madison Funds, in its Q3 2021 investor letter, mentioned Encompass Health Corporation (NYSE: EHC) and discussed its stance on the firm. Encompass Health Corporation is a Birmingham, Alabama-based healthcare company with a $6.8 billion market capitalization. EHC delivered a -16.47% return since the beginning of the year, while its 12-month returns are up by 4.51%. The stock closed at $69.07 per share on October 20, 2021.

Here is what Madison Funds has to say about Encompass Health Corporation in its Q3 2021 investor letter:

"We also added to our investment in Encompass Health, a provider of inpatient rehabilitation and home health. We believe the company will soon separate into two entities; and that will unlock value for shareholders. This is one of our favorite management teams and we see significant opportunity for both companies. We also exited several underperforming investments in this sector as COVID continues to disrupt routine healthcare procedures."

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Based on our calculations, Encompass Health Corporation (NYSE: EHC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. EHC was in 42 hedge fund portfolios at the end of the first half of 2021, compared to 36 funds in the previous quarter. Encompass Health Corporation (NYSE: EHC) delivered a -12.46% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.

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