Healthcare Providers: Bearish in the Short Term, Bullish in the Long Term

Includes: AET, KND, SKH, SUNH, UNH
by: BubbleBustInvesting

Equity markets opened up on a positive note on Monday morning, boosted by news that the U.S. Congress moved closer to a solution to the country’s national debt issue. However, not every sector of the market rallied. In fact, the healthcare providers sector sold sharply from the very beginning -- especially nursing home providers like Sun Healthcare Group (NASDAQ:SUNH), Skilled Healthcare Group (NYSE:SKH), Kindred Healthcare Group (NYSE:KND), and Sebra Healthcare REIT, that lost anywhere from 53 percent to 23 percent of their value; Aetna Ic (NYSE:AET) and UnitedHealth Group (NYSE:UNH) were also trading lower.

The problem?



Price change

Sun Healthcare Group (SUNH)


-3.75 (53.43%)

Skilled Healthcare Group (SKH)


-3.85 (43. 86)

Kindred Healthcare (KND)


-5.74 (24.43)

Sebra Healthcare REIT Inc.


-3.53 (24.49


*as of 1.30 PM EDT.

The circulation of news that the national debt deal will include healthcare spending cuts that will shave off $3.40 billion in revenues for the sector—has analysts rushing to cut earnings estimates for companies mostly exposed to this segment of the healthcare industry. Is this a buying or a selling opportunity for investors?

It depends on the investment horizon considered. For the short-term this is certainly a negative, as this is real news (if U.S. Congress passes these cuts) affecting substantially the upper line of the companies in this sector. For the long-run, however, this is a buying opportunity for three reasons. First, favorable demographics -- the rapid aging of baby boomers that is expected to boost demand for such services. Second, demand for nursing home services and skilled nurse services is inelastic, and therefore, will have little impact on the demand for such services. Third, payment for such services doesn’t come exclusively for government funds, as people buy private insurance to pay for these services.

The bottom line: Bearish in the short-term-bullish in the long-term.

Disclosure: I am long AET.