Source: Pixabay.
Most of us have already forgotten the sharp nosedive the entire healthcare sector took when the ACA was signed into law in 2010. Fears of the sweeping changes on the horizon for healthcare turned it into the worst-performing sector that year.
Since then, healthcare investors have had lots of reason to break out the champagne. In fact, since January 2011, the S&P 500 Health Care Index has climbed a whopping 221%. Compare that with the S&P 500 Index, which is up 54% over the same time period.
The total percentage of uninsured adults peaked at 18% and has consistently dropped since the exchanges opened in October 2013. It now hovers at 13.4%, according to Gallup. But since Congressional Republicans just voted to repeal Obamacare for the 62nd time (although it's the first time the bill actually heads to the White House for a certain presidential veto), what if Obamacare isn't here to stay?
While gaining all those new customers, courtesy of President Obama, certainly hasn't hurt healthcare stocks, other macro trends are providing a lift as well. Those include not just the rapid aging of the population, but also a historically higher healthcare spend for each older American, as Keith Speights pointed out in "3 Charts That Show Healthcare Stocks Should Stay Hot for Years to Come."
Bottom line: While no one can accurately predict future stock performance, there's good reason to believe the sector's long-term outsized performance isn't over. And that's with, or without, Obamacare. Here are our contributors' picks for continued strong growth.
Selena Maranjiian: Express Scripts (ESRX) is a stock to consider buying that should benefit from Obamacare. The company is a pharmacy benefits manager, an entity that, among other things, helps lower the amount that insurance companies pay for drugs. Since Obamacare is adding millions more people to the ranks of the insured, it will generate many more pharmacy users. Many of those folks are likely to be big users, too, if they have conditions that had gone untreated for a long time because they used to be uninsured.
One advantage for Express Scripts is its size, allowing it to negotiate harder for lower prices for expensive drugs. It struck a deal with AbbVie in 2014, for example, to lower the cost of hepatitis C drugs, and in late 2015, it offered a $1 alternative to Daraprim, the drug that famously had its price raised some 5,000% overnight to $750 per pill. Express Scripts is now looking at the costs of cancer drugs.
One knock against the company is its debt load, which has swollen to more than $14 billion, in large part because of some acquisitions. But it's already paying that amount down and has the cash flow to keep doing so.
Express Scripts' net profit margin of about 2.2% may seem small, but it's grown over the past few years and generates $100 billion of revenue annually. Free cash flow is rather ample, too, topping $4 billion annually. With a recent P/E ratio of 27, below its five-year average of 28, and a forward-looking P/E ratio of just 13, Express Scripts' stock appears attractively priced.
Keith Speights: If you want a stock that could win as a result of Obamacare in 2016, just look at where Obamacare is itself racking up some wins, including in Medicaid. States that have expanded Medicaid under the Affordable Care Act have seen huge enrollment growth. Molina Healthcare (MOH 1.15%) stands out as one company positioned to benefit from that growth.
Molina offers Medicaid plans in 11 states. Half of them have already expanded Medicaid, including several states with large populations, such as California and Illinois. The company also offers technology services to five other states, covering over 3.4 million Medicaid beneficiaries.
Shares have fallen more than 25% since late September, 2015. That pullback makes Molina's stock attractive, especially considering that the company's earnings are expected to quadruple by 2018. Last quarter, Molina reported year-over-year revenue growth of 45%, with adjusted earnings per share more than doubling from the prior year period. I expect Molina will continue to generate solid revenue and earnings gains throughout 2016.
Cheryl Swanson: Faced with changes unleashed by the implementation of Obamacare, healthcare insurers have been supersizing through a frenzy of mergers. While the attempt to acquire more scale and heft doesn't go smoothly in any industry, one deal I find particularly intriguing for healthcare investors is Aetna's (AET) $35 billion acquisition of Humana (HUM -3.66%).
The acquisition boosts Aetna to No. 2 in U.S. health insurers by sales, after UnitedHealth Group. A bigger, stronger Aetna bodes well for better competition. Even before that, Aetna's biggest strength was its strong position in the commercial market -- which is one of the most profitable in insurance.
The supersizing has other benefits. Aetna's individual membership was less than 5% of its total membership previously. Now, by owning Humana's membership book, it should have a prime opportunity to expand that segment. And that's not even mentioning the real prize -- Humana's 3.2 million Medicare Advantage members. Those ranks should only swell as more Americans turn 65 and become eligible.
The merger is on track to close in the second half of 2016. Once it happens, Humana will also bring to Aetna a pharmacy benefit manager so it can in-source its prescription drug plans. While Aetna recently reported a decline on the exchanges, its government businesses -- which includes Medicare Advantage and Medicaid -- are strong growth drivers and should more than offset any further decline.
From 2014 to 2024, health spending is projected to grow at a rate of around 6% per year, with Medicare spending growth expected to reach 7.3% this year, according to CMS.
So, despite a rocky start to the new year, will healthcare stocks continue to be a leading sector in 2016? I'd say yes.
