The setback for congressional Republicans and President Donald Trump after they pulled a bill that would have replaced the Affordable Care Act has left analysts with mixed views on what lies in store for the health care sector.
“We’ve got a few months of relief, but I do think this is going to come back later this year,” says Jeff Jonas, a portfolio manager with GAMCO Investors, which manages the Gabelli Funds.
Jonas says the status quo is good for hospitals because Obamacare keeps more people covered by insurance and reduces bad debt and charity care. But insurance companies have been pulling out of state health care exchanges because they have been losing money in them, and they won’t get the tax relief that would have come under the Republican bill, he says.
For investors left with an uncertain future, Eric Ervin, CEO of asset management firm Reality Shares, says dividend stocks are the safest bet for an industry that’s probably going to see volatility in the days ahead.
[See: 7 of the Best Health Care Stocks to Buy for 2017.]
“I don’t think they’re going to give up,” Ervin says. “I think they’re going to pause, regroup and attack again.”
To the extent that the Affordable Care Act is a tailwind for all health care stocks, the failure of the replacement act is a positive for the sector, says Jonathan Gelb, analyst with Alpine Woods Capital Investors, which manages the Alpine Funds. But the risks aren’t totally off the table.
Republicans could try to pass a repeal bill again, or Trump could attempt to lower drug prices and quash subsidies for health care exchanges, Gelb says.
Mike Bailey, director of research with FBB Capital Partners, thinks most of Obamacare will remain intact. A major fear has been lifted for health care stocks by providing greater certainty about profits, he says. “Investors pay a premium for certainty,” Bailey says.
Aside from several hospital companies that have already rallied, he argues that the broader health care sector has room to move up. Catalysts could include quarterly earnings calls and companies lifting profit guidance, Bailey says.
But Ervin says political uncertainty has increased and that there will be more volatility in health care stocks as a result.
In times of uncertainty, Ervin says it’s best to focus on stocks with high quality balance sheets, and dividends are good ways to assess the health of companies. Reality Shares rates companies on a variety of factors, including if they are healthy enough to pay a dividend, their free cash flow compared to their dividend and analysts’ estimates for dividend growth.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Ervin also recommends treading lightly by making incremental investments in several health care stocks, rather than one health care company.
Companies with positive dividend outlooks. Medtronic, an Ireland-based medical device company, (ticker: MDT) is expected to have good earnings growth and cash available to put toward future dividend growth over the next year, and analysts are forecasting a 16 percent dividend increase in July, Ervin says. Blue-chip stock Johnson & Johnson ( JNJ) is projected to have higher-than-average earnings growth over the next year, and analysts think the company will announce a 7 percent dividend increase in May, he says.
Managed care company UnitedHealth Group ( UNH) is expected to post solid earnings growth over the next year and have ample cash to increase dividends with, and analysts are expecting an almost 20 percent dividend hike in June. Meanwhile, Cardinal Health ( CAH), which distributes medical devices and pharmaceuticals, also is expected to have cash to grow its dividend over the next 12 months, and analysts are expecting a 13 percent dividend increase in June, he says.
Domestic hospitals. Domestic hospitals are the big winners from Obamacare’s continuation, Bailey says, noting a rally in HCA Holdings ( HCA) and LifePoint Health ( LPNT). If Republicans come back with another replacement bill, or there is a bipartisan measure with Democrats, it will likely cover more people than the GOP’s first attempt, and will probably include funding to mitigate the impact on hospitals, Jonas says.
Smaller insurers with exposure to Medicaid. Smaller insurance companies Centene Corp. ( CNC) and Molina Healthcare ( MOH), whose business focuses on the Medicaid market, also benefit under the status quo, Bailey says. These companies stand to continue benefiting from Medicaid expansion under Obamacare but could have been hurt if the Republican bill ended up rolling back that expansion, Bailey says.
[See: 7 of the Best Stocks to Buy for 2017.]
Large insurers, if replacement resurfaces and passes: For investors wanting to hedge, large managed care companies such as Aetna ( AET), Cigna Corp. ( CI), Anthem ( ANTM) and UnitedHealth could benefit from tax relief and decreased regulations if a replacement bill is revived, Gelb says.
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