DaVita: A Value Investor's Guide to High Short Interest and the Buffett Philosophy

The bearish case against DaVita is clear and aggressive. By year-end, short interest in the dialysis operator had climbed to about 11.6% of its float, a surge that put it among the most shorted names in the S&P 500. This isn't an isolated bet; it's part of a broader sector trend. Healthcare provider stocks are falling out of favor as higher operating expenses and a renewed debate over patient subsidies pressure earnings. Hedge funds have responded by turning aggressive sellers, building short positions in U.S. healthcare providers where shorts now outnumber long positions by roughly eight to one. DaVita sits at the center of that trade.

The specific concerns are tangible. The company's third-quarter results showed adjusted EPS of $2.51, badly missing estimates and falling 3% from a year ago, even as revenue grew just 4.8%. Soft treatment volumes and a recent cyberattack, which incurred charges of $11.7 million, have fueled the skepticism. This has created a classic setup for short sellers: a stock trading near one-year lows, down about 36% over the past year, with a valuation that now looks cheap on a price-to-sales basis of 0.69 versus a sector median of 4.01.

Yet, for a value investor, this is where the discipline of the long-term perspective becomes essential. The analysis must be framed by the philosophy of its most famous shareholder. Warren Buffett has stated that short selling is "not worth it" due to the risk and irritation it brings. He notes the fundamental asymmetry: while a long position has a defined loss (the price paid), a short position faces unlimited potential loss. He has observed that while there are many overvalued stocks, there are very few that are dramatically undervalued, making the short side a tougher game. Berkshire Hathaway has never engaged in short selling, a principle that underscores the firm's focus on buying businesses at fair prices, not betting against them.

The high short interest, therefore, represents powerful short-term noise. It reflects the current sector headwinds and quarterly pressures that are real but may not capture the company's long-term intrinsic value. For the patient investor, the task is to look past the irritation of a crowded bearish thesis and the volatility it can cause. The focus should remain on whether DaVita, as a provider of a necessary medical service with a strong balance sheet and a history of generating solid cash flow, is being priced below its true worth. The short sellers are making a bet on near-term pain; the value investor must ask if that pain is already priced in, leaving a margin of safety for the long term.

Assessing the Business Moat and Financial Health

The short-term noise of sector headwinds and quarterly misses can obscure the underlying quality of a business. For a value investor, the focus must shift to the durable cash-generating machine beneath the surface. DaVita operates a model built on necessity and scale, providing a stable foundation for intrinsic value.

The business is large and deeply entrenched. As of year-end, it served approximately 281,100 patients across a network of 3,166 outpatient dialysis centers. This scale creates a powerful competitive moat. Dialysis is a life-sustaining treatment with no substitute, and the company's extensive footprint ensures it is the primary provider for a vast patient base. This translates into a recurring, predictable revenue stream-a hallmark of a durable business. The model is not dependent on discretionary spending; it serves a critical healthcare need with patients who are, by definition, in a long-term treatment cycle.

Financial health is where the model's strength becomes undeniable. The company consistently converts operations into cash. In 2024, DaVita generated $1.47 billion in annual free cash flow. This is a robust figure, demonstrating the business's ability to fund its own growth, service debt, and return capital to shareholders. Even amid recent operational pressures, this cash-generating engine remains intact. The free cash flow has been consistently high, with the prior year's figure of $1.49 billion showing the business's resilience.

This operational strength is reflected in a valuation that screens as deeply undervalued. On a traditional framework, DaVita scores a perfect 6/6 valuation check, indicating it appears cheap across every metric. More compelling is a discounted cash flow analysis that projects an intrinsic value of about $332 per share, implying the stock is roughly 64% undervalued at recent prices. This disconnect between the market's current price and the estimated long-term value of the cash flows being generated is the classic margin of safety sought by value investors.

The bottom line is that DaVita possesses the hallmarks of a quality compounder: a wide moat in a necessary service, a proven ability to generate substantial free cash flow, and a balance sheet that supports its operations. The short-term challenges are real, but they do not alter the fundamental economics of serving a large, captive patient base with a scalable model. For the patient investor, this combination of scale, cash generation, and valuation offers a compelling setup. The business is being priced as if its future cash flows are uncertain; the evidence suggests they are not.

Valuation Scenarios and the Long-Term Compounding View

The value investor's task is to weigh these competing narratives and assess which one offers a sufficient margin of safety. The optimistic scenario is built on the company's undeniable financial strength and the valuation check. If DaVita can navigate its near-term headwinds and its cash-generating machine continues to operate, the stock could see a significant re-rating. This path would align with the upper end of analyst targets, potentially placing fair value near $186. The evidence for this view is the robust free cash flow, the perfect valuation screen, and the DCF model's projection of intrinsic value around $332. It assumes that the current sector skepticism is overdone and that the business's durable moat and scale will eventually command a more appropriate multiple.

The more cautious scenario, however, is grounded in the very real pressures that have driven the short interest. This view emphasizes ongoing reimbursement uncertainty and the potential for slower growth, which could cap the stock's upside. Under this narrative, fair value might settle closer to $137. The evidence here is the sector-wide debate over patient subsidies, the soft treatment volumes, and the company's own guidance for 2025. It assumes that the margin compression from higher operating costs and potential payment cuts will persist longer than hoped, limiting the growth in cash flows that the DCF model projects.

The primary uncertainty that separates these scenarios is the trajectory of Medicare and other payor reimbursements. This is the direct lever on margins and cash flow sustainability. A stable or improving reimbursement environment supports the optimistic case; continued pressure would validate the cautious one. This is the key variable a long-term investor must monitor, as it dictates the actual compounding rate of the business.

Viewed through the lens of long-term compounding, the current price offers a compelling margin of safety. Even the more cautious estimate of $137 implies a significant upside from recent levels, while the optimistic target of $186 represents a substantial re-rating from today's valuation. The DCF model's projection of intrinsic value near $332 underscores the potential for capital appreciation if the business can maintain its cash-generating power. For the patient investor, the setup is classic: a high-quality, cash-generating business is being priced as if its future is in doubt, leaving a wide margin of safety against the downside scenario. The short-term noise of sector headwinds and short selling may persist, but the long-term compounding story remains intact.

The Value Investor's Verdict: Hold, Not Sell

The analysis leads to a clear conclusion. Selling DaVita shares now would be a mistake for a disciplined investor. The current price near $118 offers a tangible margin of safety against the more cautious fair value estimate of $137. This buffer is the very essence of value investing: buying a dollar for fifty cents. To exit at this level would mean selling a business with a durable cash-generating model and a valuation that screens as deeply undervalued, which directly contradicts the goal of compounding capital over time.

Warren Buffett's philosophy provides the ultimate framework. He has stated that short selling is "not worth it" due to its inherent risks and the asymmetry of unlimited loss. His principle is to buy businesses at fair prices, not to bet against them. DaVita, with its wide moat in a necessary service and a history of generating robust free cash flow, is the kind of business Buffett would consider. The current price, however, is not a fair price-it is a deeply discounted one. Selling now would be akin to selling a dollar bill for fifty cents because the market is noisy and uncertain.

The appropriate action is not to react to the short seller's noise, but to monitor for catalysts that could widen this margin of safety. The key variable remains reimbursement stability. Any positive shift in policy expectations or a clearer path to resolving the sector's subsidy debate could accelerate the re-rating of the stock. Until then, the patient investor's role is to hold. The volatility of a stock down 21% year-to-date is irrelevant noise if the underlying business is being priced below its intrinsic value. As Buffett has warned, frequent trading only enriches Wall Street at the investor's expense. In this case, the evidence suggests the business is worth far more than the market is currently pricing. The margin of safety is present; the discipline is to wait for the right time to act, not to panic-sell.