Investment opportunities in the health care sector have begun to take shape following the passage of the sweeping reform legislation last week.
Investment opportunities in the health care sector have begun to take shape following the passage of the sweeping reform legislation last week.
Hospital operators and pharmaceutical, biotechnology and medical-device companies stand out as likely winners from an investment perspective, according to money managers and market analysts.
And insurance companies, they said, are the biggest potential losers because they will likely be hit hardest by new regulations, though they may also benefit from an increase in the number of customers.
Hospital operators are viewed as an obvious beneficiary of increased business as more Americans are expected to receive health insurance under the plan.
“It does seem like one of the clear winners will be hospitals because they are set up to win under this legislation,” said Robert Froehlich, senior managing director at The Hartford Financial Services Group Inc.
The biggest benefit to hospitals is that they should be able to reduce the amount of bad debt that they have had to absorb by providing services to uninsured patients, he said.
“With insurance coverage being expanded to include more people, that should reduce the bad-debt problem,” Mr. Froehlich said.
Some hospital operators saw their stocks boosted by the legislation.
For instance, shares of Tenet Healthcare Corp. (THC) spiked 9% last Monday.
And in the week leading up to the weekend vote on health care reform by the House of Representatives, shares of MedCath Corp. (MDTH) shot up almost 41%.
Nevertheless, hospital stocks could also come under pressure because of reduced profit margins that will result as the government works to push down the cost of providing medical services, money managers said.
Meanwhile, medical-device, pharmaceutical and biotechnology companies survived the legislation relatively unscathed — a fact that the market had already built into their valuations.
“Big pharma is still a work in progress because there could be some additional costs they have to deal with, but they will also see additional volume,” Mr. Froehlich said. “Clearly, the pressure will be to lower costs, and that plays into the sweet spot for generic-drug makers.”
Insurance companies could be both hurt and helped by the legislation. “Managed care introduces a bit of a dichotomy because the new regulations will squeeze profit margins and hurt smaller companies, but the larger insurance companies should be able to take advantage of their operating leverage,” Mr. Froehlich said.
Although some could argue that it is way too premature to invest now based on the impact of laws that won't start taking effect for three or four years, the passage of the legislation nevertheless has calmed some nerves.
“We can now look at health care companies the way we've always wanted to look at them, and not worry about the overhanging legislation,” said Uri Landesman, head of global growth at ING Investment Management Americas.
Mr. Landesman, who manages $1.7 billion in pension assets, isn't a fan of the legislation, but he is pleased that he no longer will be handicapping stocks based on guesswork.
“Traditional health care investors can now actually value these companies without trying to figure out what the wackos in Washington are going to do,” he said.
“As the onion gets peeled back and each level of uncertainty disappears, it will become clearer who the winners and losers are, and the market will adjust along the way,” said Harry Rady, chief executive and portfolio manager at Rady Asset Management LLC, which has $250 million under management.
For the first time in more than a year, money managers said, they can gauge with some semblance of clarity the likely impact of health care reform on specific companies and subsectors across the health care industry.
“I think the entire health care sector should benefit, because the cloud of uncertainty has been lifted with the passage of the bill,” said Adam Strauss, manager of the $125 million Appleseed Fund (APPLX).
“To this point, the health care sector has not increased in stride with the rest of the market, and there are a lot of companies still trading at valuations near their 20-year lows, with excellent growth opportunities,” said Mr. Strauss, a partner at Pekin Singer Strauss Asset Management, which offers the fund.
Based on price-earnings ratios, the overall health care sector is trading at about an 8% discount to the S&P 500, and many money managers think that this valuation gap will start to look more attractive as the uncertainty over reform subsides.
With so many moving parts in a nearly 3,000-page piece of legislation that is still being heavily debated, money managers are reluctant to label any one category as either good or bad right now.
And despite the significance of the reform package, Mr. Froehlich emphasized that it is still just one element of what investors should consider when investing in the health care sector.
“Some of this goes into effect starting in 2013, but full implementation isn't until 2019, and investors need to realize that legislation is written in pencil, not in stone,” Mr. Froehlich said. “No one knows what will happen to this legislation, because no one knows what Congress or the White House will look like in a few years.”
That point was echoed by Thomas Samuelson, chief investment officer at Advanced Equities Asset Management.
Although he recognizes that health care reform will continue to be dynamic, he thinks that the legislation gives everyone a better idea of what to expect for at least the next few years.
“It appears the worst-case fears of government taking over all of health care will not come to pass, and everything is not going to [a] single-payer system,” Mr. Samuelson said.
But just as some see the next few years as a time of relative calm in the health care overhaul, others insist that investors nevertheless should take a deliberate approach to the sector.
“In my opinion, it would be a gamble to invest now, based on what this reform is going to ultimately create,” said Jeffrey Beamer, manager of the Lacerte Guardian Fund (LGFIX), which is offered by Lacerte Capital Advisers LLC.
“But if everybody has health insurance, they'll be taking advantage of it, and if they can't get in to see a doctor, they will go to a hospital,” he said. “I guess investors are already banking on the prospect of patients' filling the hospital beds.”
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
