Health Care Stocks: Not For The Faint Of HeartAmey Stone
President Clinton's long-anticipated health-care reform package will be officially unveiled on Sept. 22, but health-care reform--and the accompanying volatility in medical and related stock prices--have been with us for a while. Analysts figure the proposed plan will just reinforce trends toward consolidation and cost containment that are already well under way, but they expect stocks to continue on a roller-coaster ride while a bill is hammered into law.
In the past few weeks, the massive price swings that rocked the industry in February have returned. "There is a statement a day that is directing stock prices for that day," says Joanne Soja, manager of Putnam Health Sciences Trust.
WORTH WATCHING. But many money managers think the sector is close to bottoming out and that plenty of stocks are well worth watching. So the next few weeks could provide excellent opportunities to buy. "There have been days when these companies have really tanked, and if you bought, you would have done really well," explains Geoffrey Harris, an analyst at Smith Barney, Shearson.
For health-care services stocks, the trick is to find companies that dominate their market. There is overcapacity in in-patient rehabilitation and psychiatric care, says John Hindelong, an analyst at Donaldson, Lufkin & Jenrette Securities. But nursing homes and acute-care hospitals that can contain costs will benefit from demographic trends. Hindelong recommends Healthtrust, a hospital operator that has a very low price-earnings ratio of about 13 for a company that is expected to grow more than 15% a year. A favorite nursing-home pick is Health Care and Retirement, which is expanding and has occupancy rates above 90%.
Many analysts also see opportunities with managed-care companies, such as health- maintenance organizations (HMOs) and preferred provider organizations (PPOs). Harris favors Intergroup Healthcare, United HealthCare, and Coventry, which are expanding in cities such as St. Louis and Atlanta, where there is room for enrollment growth. MEDICAL HEADHUNTERS. Companies that act as service subcontractors to health-care providers also stand to benefit from reform. Stuart Freeman of A.G. Edwards & Sons likes Coastal Healthcare Group, which recruits physicians for hard-to-fill positions in hospitals and handles administrative duties for medical staff. Coastal saves individual hospitals money through nationwide recruiting and administrative economies of scale.
But if you plunk your money down now, be prepared to take hits on a day-to-day basis. The prognosis for Clinton's health-reform proposals will take months to become clear.
THE PROS' TOP PICKS Company Stock 1992 Estimated price Earnings 1993 Sept. 13, 1993 per share EPS COASTAL HEALTHCARE 27 $.87 $1.08 HEALTH CARE AND RETIREMENT CORP. 191 1/4 .94 .99 HEALTHTRUST 21 1.56 1.66 UNITED HEALTHCARE 55 2.00 2.25 DATA: A.G. EDWARDS; DONALDSON, LUFKIN & JENRETTE; SMITH BARNEY