Markets

Home Health Care Stock Poised For An Explosive Breakout

"The world is on the brink of a demographic milestone," claims the World Health Organization (WHO).

According to WHO, children have outnumbered adults since the beginning of recorded history. But this situation is poised to change. For the first time, seniors over age 65 will soon outnumber children under 5. Two factors primarily account for this shift: declining fertility rates and medical advances prolonging life spans.

This demographic shift creates a big opportunity for select health care firms.

Against the backdrop of the increasing need for medical care due to longer life expectancies, a trend is emerging. U.S. hospitals appear to be losing patients to ambulatory and homecare services. Over the past five years, hospital inpatient stays have declined 4% while the home health care market has grown.

And it looks like this trend will continue. According to a 2014 report by Transparency Market Research, the global home health care market is expected to explode to $303.6 billion in 2020, up from $176.1 billion in 2013, growing at a compound rate of more than 8% per year.

One company that should be a direct beneficiary of the growth in home health care is Kentucky-based Almost Family (NASDAQ: AFAM ) . Founded nearly 40 years ago, it is the fourth largest home health care provider in the United States with 234 branches in 14 states.

The company operates three major segments. Visiting nurse services provides recuperative care to patients at home. The personal care division offers services ranging from medication management to meal preparation. Finally, the health care innovations division provides a number of technological and informational services, such as population health management.

Almost Family appears focused on expansion and recently completed several major acquisitions that should enlarge its footprint across the United States.

In late February, management announced the second largest acquisition in its history, saying it will pay up to $53 million for privately owned WillCare HealthCare, a home services provider that had $72 million in revenue during 2014. With this acquisition, Almost Family hopes to generate close to $600 million in 2015 revenue, up from $495.8 million last year.

News of the acquisition and robust fourth-quarter and full-year 2014 results, also reported on Feb. 25, sent the stock soaring. Since then, shares have risen more than 55%.

For much of 2013, AFAM traded in a narrow range between $17 and $21. However, in November of that year, shares moved powerfully higher on a surge in volume, breaking out of the narrow trading range and peaking just under $34 in December 2013.

The gains, however, couldn't be held. AFAM retreated to the former trading range, bottoming just under $20 in June 2014. From here, shares began their current uptrend. In February 2015, they again came close to $34 resistance but were unable to penetrate the December 2013 high.

However, on upbeat Q4 earnings and the WillCare acquisition news, the stock catapulted through resistance and lifted off the major uptrend line. Over the past five weeks, it formed a steep accelerated uptrend line. In the process, shares completed a 14-month rounding basing pattern.

Shares are currently trading at a multiyear high just below $47. More importantly, they are just a few dollars away from the October 2008 all-time high near $50. If the stock can take out this level, there will be no historical resistance in sight and the sky is virtually the limit.

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According to the measuring principle, calculated by adding the height of the six-year-plus range to the breakout level, shares could potentially reach a new high near $76 ($48-$20 = $28; $48+ $28 = $76). At current levels, this target would present traders with roughly 64% potential returns.

I am going to be more conservative, however, and set my target at $59.95, below $60 round number resistance, which is nearly 30% above current prices. If the stock approaches this level, longer-term traders should evaluate their position and keep the $76 target in mind.

The bullish technical outlook is supported by upbeat fundamentals.

For the upcoming first quarter, scheduled to be reported in early May, revenue will increase 3.4% year over year to $124.2 million. Earnings are expected to jump 29.4% to $0.44 per share from $0.34 in the year-earlier quarter.

For 2015, analysts expect revenue to rise 6.5% to $528 million. However, as I mentioned, with the recently announced WillCare acquisition, management is optimistic full-year revenue could approach $600 million. Full-year earnings are estimated to increase 13.3% to $2.05 per share from $1.81 last year.

Given the bullish technical and fundamental outlook, I plan to go long on the home health care provider.

Recommended Trade Setup:

-- Buy AFAM at the market price

-- Set stop-loss at $39.95

-- Set price target at $59.95 for a potential 29% gain by late 2015

This article was originally published on ProfitableTrading.com: Home Health Care Stock Poised for an Explosive Breakout

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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