By John Derrick, Director of Research, U.S. Global Investors
The health care overhaul legislation that President Obama signed into law this week brought about strong opinions on both sides of the issue. There’s not much use in revisiting the debate at this point, but a look at the market’s reaction could be instructive.
The broad market rose this week, perhaps glad to put the health care uncertainties behind it. On the other hand, the initial reaction in the health care sector was positive, but by the end of the week, the sector was down 1 percent. While there were some stock-specific negatives unrelated to the legislation, certain groups in the sector fared worse than others.
The managed-care companies, such as HMOs, were among the biggest losers – as a group they fell more than 3 percent, and several stocks in that group fell even further. Because the new law expands coverage to 32 million currently uninsured, it may appear to be a positive for the insurance companies, which will have more customers. The potential downside, however, is that they may be more costly customers – such as those with pre-existing conditions – and the law reduced other subsidies.
In the long run, the biggest beneficiaries may be the hospitals, as they will have many new paying customers and a likely reduction in bad debts. The pharmaceutical industry may also benefit from an increased customer base.
Our focus on government policies and our contrarian tendencies tell us that, after a decade of compressing valuations, an opportunity may be at hand in health care.
Concerns remain that this legislation will compress margins in the industry and potentially stifle innovation, but landmark events such as this week’s bill signing often signal turning points in markets as negative sentiment bottoms out and then reverses course.
