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Adeptus Health: Questionable Business Model + Insider Selling = Short Opportunity

Adeptus Health is a Jobs Act IPO with a questionable business model that may prove to be flawed. Price target is $60 (45% downside).

Adeptus Health has seen massive insider selling as its stock price is up +500% since its June 2014 IPO.

Proposed legislation in Texas highlights the business model issues and patient dissatisfaction.

Revenue growth is projected to slow significantly over the next two years as expansion options may be limited.

Adeptus Health (NYSE:ADPT) is a standalone emergency room operator with locations in Texas, Colorado, and Arizona. It came to the public markets through a June 2014 Jobs Act IPO. The company has had massive revenue growth over the last years as its number of locations rocketed from 38 around the IPO to 69 currently (an 81% increase). Its revenues grew 110% in Q2 from a year ago, mainly driven by the massive expansion in its number of locations. That expansion of locations will begin to slow going forward, and you can expect the revenue growth to slow, as the company faces expansion challenges. The company operates the brands First Choice Emergency Rooms in Texas, UC Health Emergency Rooms in Colorado, and Dignity Health in Arizona; the second two being joint ventures (JVs).

Adeptus Health is a great short opportunity for the following reasons:

- Standalone emergency rooms (ERs) have an unproven business model. It is still unclear if people are willing to pay for the services (which are often "out of network") associated with using these standalone ERs. Customers often confuse these ERs with lower cost urgent care facilities, only to get an unexpected bill later.

- Insiders are selling their shares in the company at an alarming rate.

- By shifting strategy to build hospitals instead of standalone emergency rooms, the company's management are either terrible capital allocators or are somewhat acknowledging that they are unsure of the business model of standalone ERs.

- The valuation has reached sky-high levels and the stock chart looks like a classic bubble stock (see AMBA for a recent example)

Short term, the stock price target of $90 is easily possible within a few weeks, if...