We recently compiled a list of the Diamond Hill Capital’s Top 10 Stock Picks.In this article, we are going to take a look at where HCA Healthcare, Inc. (NYSE:HCA) stands against Diamond Hill Capital's other stock picks.
Heather Brilliant’s Diamond Hill Capital is a Columbus, Ohio-based investment management firm founded in 1997 by Ric Dillon, who managed the company until 2019. Mr. Dillon and several members of his team broke off to form VELA Investment Management that year, which led to the addition of Heather Brilliant to the CEO position at Diamond Hill.
Ms. Brilliant earned an MBA from the University of Chicago Booth School of Business, as well as a degree in economics from Northwestern University. She has since accrued more than two decades of experience in the domestic and international investment markets, including nearly 14 years at Morningstar that culminated in her managing the company’s Australasia division, as well as a successful run as CEO, Americas at First State Investments.
Ms. Brilliant has taken major strides to refocus Diamond Hill in her five years at the helm of the company, closing its private asset management division and several of its investment strategies that didn’t align with the fund’s core value investing ethos. Meanwhile, the fund has bulked up its focus on long-term value and fixed income investing by reworking and growing its teams in those disciplines, and adjusting its operational processes and expectations.
In a November interview on Bloomberg’s The Close, Ms. Brilliant noted that in the current environment of earnings volatility, her team is focused on uncovering high-quality businesses trading at fair valuations. When asked about her team’s approach to investing in broader sectors experiencing secular tailwinds, specifically the utilities sector, Ms. Brilliant said that while the “story” of power-hungry AI is a good one, she was unconvinced by the valuations in the space, noting that she instead likes some of the pricing trends in the insurance space.
That was evidenced by the fund’s large-cap strategy (Q3 investor letter here) adding two big insurance names to its portfolio in Q3, a quarter in which the fund returned 7.84% net of fees, beating the benchmark Russell 1000 Index by 1.76 percentage points. That lifted its year-to-date returns to 14.7% net of fees, ahead of last year’s 13.7% return. The large-cap strategy returned 25.7% in 2021 and 32.2% in 2019.
The Diamond Hill Small Cap Fund (Q3 2024 investor letter here) also added some insurance names to its portfolio during Q3 and rattled off a solid quarter of 8.43% gains, though that trailed the benchmark Russell 2000 Index by 84 basis points. The fund has returned just under 10% annually since inception, beating the Russell 2000 by nearly 200 basis points.
There’s been relatively little volatility in Diamond Hill’s overall sector allocations over the past year, with finance stocks continuing to account for nearly a quarter of the fund’s 13F portfolio, which was valued at $24.7 billion on September 30, up from $23.4 billion at the end of June. Consumer discretionary, healthcare, and industrials stocks were next at 15.9%, 14.1%, and 13.7% exposure respectively. Tech stocks rounded out the fund’s top 5 sectors at 8.6% exposure.
Our Methodology
The following data is gathered from Diamond Hill Capital’s latest 13F filing with the SEC.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here). That’s why you should pay close attention to this important indicator.
Note: All hedge fund data is based on the exclusive group of 900+ active funds tracked by Insider Monkey that filed 13Fs for the Q3 2024 reporting period.
A team of healthcare professionals in lab coats and masks meeting at a hospital ward.
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $608 million
Number of Hedge Fund Shareholders (9/30/2024): 70
Diamond Hill and the broader hedge fund industry alike were paring back their positions in HCA Healthcare, Inc. (NYSE:HCA) during Q3 following the stock’s strong performance during the first nine months of 2024. Diamond Hill unloaded 5% of its HCA stake during Q3 to leave it with just under 1.5 million shares. The stock has dipped by 22.6% in Q4, giving back more than half of its year-to-date gains.
HCA Healthcare, Inc. (NYSE:HCA) operates over 2,000 healthcare facilities and has gradually increased its market share in the U.S. over the past decade. That figure currently stands at 27%, which the company plans to grow to 29% by the end of the decade. The company recently backed its FY24 revenue guidance of $69.75 billion to $71.75 billion, as well as its adjusted EPS view of between $21.60 and $22.80 in earnings, despite the disruptions caused by two major hurricanes hitting the U.S in the span of less than two weeks.
Analysts are bullish on hospitals in 2025 after a very strong year in 2024, though there is some concern surrounding Republicans sweeping into office and what effect that will have on the Affordable Care Act and enhanced exchange subsidies.
The Diamond Hill Large Cap Strategy is bullish on the improving macro fundamentals of HCA Healthcare, Inc. (NYSE:HCA), as the fund discussed in its Q1 2024 investor letter:
“Among our top individual contributors in Q1 were American International Group (AIG) and HCA Healthcare, Inc. (NYSE:HCA). Health care facilities operator HCA Healthcare benefited from a strong demand environment for hospitals in Q4, which is expected to continue into 2024 as nursing labor costs normalize and companies are able to improve margins tied to above-average physician costs. As a best-in-class operator with unique assets in favorable geographies, we believe the outlook for HCA Healthcare from here is favorable.”
Overall HCA ranks 6th on our list of Diamond Hill Capital's stock picks. While we acknowledge the potential of HCA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HCA but that trades at less than 5 times its earnings, check out our report about thecheapest AI stock.
