The signing on Tuesday of the landmark legislation removes much of the uncertainty that's been hanging over the medical industry.
The investment opportunities in the health care sector began to take shape this week following the passage of the sweeping reform legislation.
“I think the entire health care sector should benefit, because the cloud of uncertainty has been lifted with the passage of the bill,” said Adam Strauss, manager of the $125 million Appleseed Fund Ticker:(APPLX).
“To this point, the health care sector has not increased in stride with the rest of the market, and there are a lot of companies still trading at valuations near their 20-year lows, with excellent growth opportunities,” added Mr. Strauss, a partner at Pekin Singer Strauss Asset Management.
For the first time in more than a year, money managers said, they can gauge with some semblance of clarity the likely impact of health care reform on specific companies and subsectors across the health care industry.
While some could argue that it is way too premature to invest now based on the impact of laws that won't take effect for three or four years, the passage of the legislation nevertheless has sparked some activity.
“We can now look at health care companies the way we've always wanted to look at them, and not worry about the overhanging legislation,” Uri Landesman, head of global growth at ING Investment Management Americas, said.
Mr. Landesman, who manages $1.7 billion in pension assets, is not a fan of the legislation, but he is happy that he will no longer be handicapping stocks based on what he thinks Congress might be planning to do.
“I think the removal of the [legislative] overhang was a good thing,” he said. “Traditional health care investors can now actually value these companies without trying to figure out what the wackos in Washington are going to do.”
Based on price-to-earnings ratios, the overall health care sector is currently trading at about an 8% discount to the S&P 500, and a lot of money managers believe that this valuation gap will start to look more attractive as the uncertainty over reform subsides.
“As the onion gets peeled back and each level of uncertainty disappears, it will become clearer who the winners and losers are, and the market will adjust along the way,” said Harry Rady, chief executive and portfolio manager at Rady Asset Management LLC, which has $250 under management.
While some managers are still trying to find some solid footing in the health care space before taking any action, the general consensus seems to be that medical-device makers, and pharmaceutical and biotechnology companies, will be the least affected by new regulations and taxes under the reform plan.
Hospitals are viewed as an obvious beneficiary of increased business as more American's are expected to receive health insurance under the plan. But the flip side of that is reduced profit margins that will result as government works to push down the cost of providing medical services.
This theory of offsetting slimmer profits with volume was played out Monday when shares of Tenet Healthcare Corp. Ticker:(THC) spiked 9%.
Health insurance companies are seen as the category likely to be most affected by increased regulations, but that group is also being viewed as a likely winner in the scenario of higher volumes and lower profits.
One example here is Aetna Inc. Ticker:(AET), which saw its stock price spike more than 10% over the past five trading days.
“In my opinion, it would be a gamble to invest now, based on what this reform is going to ultimately create,” said Jeffrey Beamer, manager of the Lacerte Guardian Fund Ticker:(LGFIX), offered by Lacerte Capital Advisers LLC.
“But if everybody has health insurance, they'll be taking advantage of it, and if they can't get in to see a doctor, they will go to a hospital,” he added. “I guess investors are already banking on the prospect of patients' filling the hospital beds.”
