Encompass Health: A Contrarian Gem Amid Insider Selling and Institutional Buying

The healthcare sector has long been a haven for investors seeking steady growth, but few companies today offer the combination of robust earnings momentum, strategic expansion, and contrarian opportunity that Encompass Health (NYSE:EHC) presents. Despite recent insider selling, the company's financial performance, sector tailwinds, and institutional buying activity suggest this is a prime time to buy—before the broader market catches on.

The EPS Growth Story: A Foundation of Strength

Encompass Health's first-quarter 2025 results were nothing short of exceptional. Diluted EPS surged 33.3% year-over-year to $1.48, while adjusted EPS jumped 22.3% to $1.37. This outperformance was fueled by a 10.6% rise in net operating revenue to $1.46 billion, driven by higher discharges (+6.3% to 65,000) and improved pricing per discharge (+3.9% to $21,816). Cash flow metrics also shined: operating cash flow climbed 20.9% to $288.6 million, and adjusted free cash flow soared 32.7% to $222.4 million.

The company's revised full-year 2025 guidance underscores its confidence:
- Net revenue: $5.85–5.925 billion (up from prior $5.8–5.90 billion)
- Adjusted EBITDA: $1.185–1.220 billion (previously $1.16–1.20 billion)
- Adjusted EPS: $4.85–5.10 (vs. prior $4.67–4.96)

These numbers aren't just growth—they're a signal of operational discipline. Even as the company faces headwinds like rising medical costs (+14% in benefits expense per FTE), it's expanding capacity through new hospitals and bed additions, including a 40-bed joint venture in Athens, Georgia, and plans to open six additional De Novo hospitals (300 beds) in 2025.

The Contrarian Play: Insider Selling ≠ Weakness

The elephant in the room is the $1.8 billion in insider selling by top executives in early 2025. CEO Mark Tarr offloaded $174 million worth of shares in May, while CFO Doug Coltharp sold $582 million in April. Critics may interpret this as a lack of confidence, but a closer look reveals a different narrative.

First, insider selling is often tied to compensation structures. Executives at public companies frequently hold large equity stakes and may sell shares periodically to diversify portfolios or meet financial obligations—especially after stock price appreciation. Encompass Health's shares rose to a 52-week high of $121.96 in 2025, creating a natural opportunity for profit-taking.

Second, institutional investors are stepping in to buy what insiders sold. Despite the $1.45 billion in institutional outflows over the past year, inflows of $1.51 billion created a net $60 million inflow—a net positive. Notable buyers include AQR Capital Management (+689,206 shares) and Northern Trust Corp (+1 million shares). Meanwhile, analysts have upgraded EHC to "Strong-Buy", with a $120.86 price target—a 6% upside from current levels.

Sector Tailwinds: Post-Acute Care's Golden Age

Encompass Health is positioned at the intersection of two unstoppable trends: aging populations and the shift to post-acute care (PAC). The U.S. population over 65 is projected to grow by 34% by 2030, driving demand for rehabilitation, skilled nursing, and home health services—Encompass's core strengths.

Moreover, Medicare reimbursement reforms favor providers like Encompass that focus on cost-efficient, outcome-driven care. The company's strategy of expanding high-margin inpatient rehab facilities (IRFs) and outpatient clinics is a direct response to this shift. With 40 new beds added in Q1 and six more hospitals in the pipeline, EHC is scaling to meet rising demand.

Technical Setup: A Favorable Risk-Reward Profile

The stock's technicals add to the bullish case. After hitting a 52-week low of $82.74 in late 2024, EHC has rebounded sharply, closing at $118.50 on May 26—a 43% gain from its low. The current yield of 0.57% (based on a $0.17 quarterly dividend) is modest but stable, and the stock's price-to-earnings ratio of 24.5x remains reasonable given its growth trajectory.

Final Call: Buy Now—Before the Crowd Does

Encompass Health isn't just a healthcare play—it's a contrarian gem. The recent insider selling is a red herring, masking a company with solid fundamentals, sector leadership, and institutional support. With PAC demand surging and EHC's operational execution on track, this is a rare chance to buy a growth story at a relative discount.

Action Item:
- Buy EHC if shares pull back to the $110–115 range (near the 200-day moving average).
- Target: $120–125 within six months, with upside to $130+ if Q2 results beat estimates.
- Risk: Monitor group medical expense trends and regulatory risks, but the long-term tailwinds outweigh these concerns.

Historically, when Encompass Health exceeded earnings guidance between 2020 and 2025, a buy-and-hold strategy for 60 days delivered an average return of 43.63%, though with a maximum drawdown of -42.98%. This underscores the potential for gains but demands risk tolerance.

In a market obsessed with fear of insider selling, Encompass Health offers a compelling opportunity to profit from misplaced skepticism. This is a stock to own—and own aggressively—in 2025.