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Tickers in this Article: THC, UHS, CYH, LPNT, HMA
What's the old saying about stocks? The higher they fly, the farther they fall? The opposite rings true as well - the harder they fall, the higher they bounce. If you don't believe it, ask anyone who owned shares of Tenet Healthcare (NYSE:THC) prior to its well-deserved 44% bounce to $2.05 per share on April 21. The bullish rise occurred on the news of an impending swing back to profitability for the yet-to-be-reported Q1 of 2009. The stock had been shalacked since last fall after it was realized that Tenet's Q3 2008 move into the black wasn't yet a permanent condition.

While I'll offer congratulations to those lucky investors who owned Tenet shares, I'm more interested in how well this bodes for other hospital stocks that didn't make a 44% bullish rip in one day. That's where things get even more interesting.

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Rebound Opportunity
Despite the 4.6% charge led by Tenet on April 21, the S&P Health Care Facilities Index is still in one deep hole going back the last 12 months. It's down 16.3% for the last six months, and down 47.7% for the last 12. That lags the broad S&P 1500, but more importantly, it spells rebound opportunity in the shadow of Tenet's green light.

Though Tenet's demise last year and rebirth April 21 is probably the biggest hospital turnaround story unfolding right now, that may be a function of size more than something uniquely troubling to the company. After all, Tenet is the only hospital stock in the S&P 500. The next-biggest healthcare facility stock - Universal Health Services (NYSE:UHS) - is a component of the S&P 400 Mid-Cap Index and may have been off most radars.

All Hospitals Experienced Headaches
In other words, don't think that other hospitals weren't experiencing the same cost headaches as Tenet simply because you haven't heard about them. They were all struggling.

Take LifePoint Hospitals (Nasdaq:LPNT) and Health Management Associates (NYSE:HMA), for instance. Both hospitals saw modest declines in admissions last year, thanks to the decline in consumer spending, which of course was fueled by rising unemployment rates. Though a small taper in the top line may not be tough for other industries to handle, hospitals found a slightly weaker top line coupled with bad debt (again, thanks to the recession), tougher Medicaid and insurance payments, and lots of leverage that pushed margins to the brink.

That's likely the reason that the S&P 400 Health Care Facility Index was cut in half between September and November of last year. The same index - which includes Health Management Associates, LifePoint, Community Health Systems (NYSE:CYH) and previously mentioned Universal Health Services - is still lagging the comparable S&P 400, and is still down 36.4% for the last 52 weeks.

The Point?
The hint we should all be taking from Tenet Healthcare's cue on April 21 isn't necessarily to pile into Tenet shares. Rather, I think we can reasonably assume what Tenet managed to do is also being done by its mid-cap brethren - a group we don't have to chase down following a 44% surge. Better still, the fundamentals largely agree that the mid-sized hospital stocks are undervalued at current levels. (Learn how to put one of the top equity analysis tools to work for you; read Peer Comparison Uncovers Undervalued Stocks.)

Closest Cousins
As they say, the numbers don't lie. While hospital margins did indeed take a hit across the board in 2008, if the forecasts are close to correct, 2009 should be a much better year for the healthcare facilities industry. Take a look at the table; price-to-earnings ratios are under historical (five-year) norms for Tenet's little brothers and sisters, while forward-looking price multiples and margins forecasts are very attractive.

Company Universal Health Services Community Health Systems
LifePoint Hospitals
Mgmt. Associates
Last Price 41.93
EPS, last 12 months 3.78
Net margin, last 12 months 3.84%
Estimated EPS, current year 3.95
Estimated EPS, next year 4.29
Forward P/E, 12 months

It's Time To Check Yourself In
Yes, many of these forecasted numbers rely on some help from further improvement in the economy. But that's solidifying a little more every day. Though a complete economic recovery is apt to push technology, financials and basic materials stocks to the top of the heap, undervalued hospital stocks are poised to be the lower-risk, stealthy winners of such a rebound.

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