Milwaukee Journal Sentinel Investment Trends column [Milwaukee Journal Sentinel]

May 26--Rather than pick stocks based on which investment style is in favor or which direction interest rates move, Milwaukee money manager Brandon Nelson looks for companies that are on a growth trajectory.

His ideal companies are those whose earnings are poised to exceed analysts' expectations and whose stock valuations are improving, said Nelson, co-founder and chief investment officer at Timpani Capital Management LLC.

Even with all of the uncertainties associated with the Patient Protection and Affordable Care Act, also known as Obamacare, Nelson says he has found several companies that have the traits he's looking for and, therefore, the potential to grow rapidly.

With key provisions of Obamacare set to be rolled out in 2014, questions remain about everything from the mechanics of the exchanges, where consumers will buy health insurance from private providers, to who will run them and what might be the unintended consequences of health care reform.

"The bottom line is that health care is being opened up to a broader audience," Nelson said. Both of these small-cap companies have potential to surprise investors on the upside, he added.

TeamHealth Holdings Inc. (TMH, $38.55), Knoxville, Tenn., provides outsourced physician staffing to about 800 hospitals and health care providers in 47 states. About 70% of the company's revenue comes from emergency room staffing, Nelson said.

Even before Obamacare, TeamHealth has generated strong revenue and earnings growth from existing business, new contract wins and acquisitions of physician groups. But Obamacare could add enough fuel to bring annual growth to per-share earnings of 25% over the next three years, Nelson said.

"There aren't many companies I can say this about where I've got a road map for that kind of growth in this economy," he said. TeamHealth may be among the companies best positioned to benefit from Obamacare, he added.

About 22% of the emergency room patients that TeamHealth physicians see are uninsured, Nelson said. The company gets an average payment per visit from those patients of $35, compared to $135 from Medicare patients and $250 from managed care patients. Nelson said it's unclear how much and how fast that $35 average payment will rise, but he expects it to increase sharply as Obamacare pushes people to become insured. That will lead to more revenue on the same cost structure, resulting in margin improvement, he said.

It may seem counterintuitive that emergency room visits would rise when more people have insurance, but they rose 8% in 2006, the first year after Massachusetts adopted health reform, Nelson said. The increase in volume is expected to result from a shortage of primary-care physicians that drives people to seek care through other means, he added. There is also some evidence that, in the short term, Medicaid reimbursements may rise for emergency room services in some states, Nelson said.

The Blackstone Group, a private equity firm that acquired TeamHealth in 2005, probably had been keeping the company's share price lower because of its sales of large numbers of shares, he said. Blackstone sold the last of those shares in February.

The biggest risks to TeamHealth shares are the possibility of delays in Obamacare implementation that could slow projected growth, and questions about payments TeamHealth physicians will receive from health care exchange patients, he said.

TeamHealth shares have traded in a range of $21.69 to $39.87 in the last 52 weeks. They could trade as high as $60 in the next 12 months, Nelson said.

Maximus Inc. (MMS, $73.12), Reston, Va., provides program management and consulting services to government health and human services agencies in the United States and other countries.

Maximus derives 64% of its revenue from health services and the rest from human services work. Nelson said the health services area should benefit from Obamacare in at least two ways:

-- The Medicaid program is projected to expand to 12 million participants by 2020, from 8 million now. The enrollment process is outsourced to Maximus.

-- Maximus has won a number of contracts to help states create health insurance exchanges. "This is new business that doesn't exist today that's coming, and Maximus is right in the middle of it all," Nelson said.

Maximus has the potential to increase earnings 25% annually during the next two to three years, Nelson said.

The biggest risks to holding Maximus are the possibility the company could fail to continue winning contracts and the question of whether more states than the 25 already committed will expand Medicaid, Nelson said.

Maximus shares have a 52-week trading range of $43.79 to $81.37. They could reach $105 in the next 12 months, Nelson said.

About this

The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.

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