Saturday, July 7, 2012

What Happened to Health Care Provider Stocks?

Leading up to and immediately following the Obamacare Supreme Court decision, most health care stocks and funds were in focus. Companies and ETFs in this space saw outsized trading volumes as a result, while many slumped as soon as the final decision was revealed.

Most of the health care firms have since rebounded with many segments of the important industry seeing their stocks rise by a few percentage points over the past week. However, one corner of the industry has stuck out as a big loser, unable to recoup its losses after the announcement; health care plans/HMOs (read Health Care ETFs in Focus On Obamacare Supreme Court Decision).

Overall, this has easily been the worst performing segment over the past week in the broad health care space as all of the biggest companies in the industry are in the red. This is in sharp contrast to the pharma, biotech, and medical device/instrument firms, which have all managed to start July on a strong note.

This trend is especially puzzling because of what the Obamacare ruling could do for the HMO space. Many analysts believe that the controversial individual mandate would be a boon for HMO providers as it would add millions to their rolls, with many being very healthy and younger individuals.

Seemingly, investors have instead focused in on the fact that children will get to stay on the parent’s plans and the new stipulations regarding a lack of lifetime care caps and rules regarding pre-existing conditions. These changes could potentially cancel out any benefits from the millions of fresh new clients and could possibly be the reason for health care plan companies’ slump after the Supreme Court decision.

Thanks to this negative sentiment, all six of the health care plan providers in the S&P 500 are down significantly over the past week. This includes a near 11.6% loss for WellPoint (WLP), 7.6% slump for Aetna (AET), a 7.1% slide in Coventry  Health Care (CVH), and a nearly 6% loss for the biggest of the bunch, UnitedHealth Care (UNH).

To me, this seems a bit overdone, particularly considering the solid performances that investors have seen in the rest of the health care space. After all, over the past week, the Health Care Select Sector SPDR (XLV) is actually up about 1%, demonstrating that the ‘sickness’ in health care stocks is pretty much only afflicting health care plans/HMOs at this time (see The Five Best ETFs over the Past Five Years).

Another factor to consider for the HMO space is the current Zacks Industry Rank. At time of writing, the HMO segment was currently ranked—admittedly in a rather large tie—for 106 out of 265 from this metric. This includes a few firms that are Ranked 2 or ‘Buy’ while it should also be noted that the segment has surged by about 50 places in the past week, suggesting that the underlying fundamentals for the space aren’t as bad as investors have experienced over the past few days.

While it should be noted that all this could change as we approach the summer earnings season, the space could still be an intriguing choice for investors looking for a beaten down sector in today’s market environment.

What do you think? Is now the time to get in on health plan providers/HMOs? Or should investors continue to hold out and put their cash to work in other corners of the health care market?

Let us know what you think in the comments below!

Follow @Eric Dutram on Twitter

Read the analyst report on WLP

Read the analyst report on CVH

Read the analyst report on AET

Read the analyst report on UNH

Read the analyst report on XLV

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