Healthcare Sector: Top Buy and Sell Ideas Based on Big Movers From Last Week

by: GuruFundPicks

The ugly budget fight and the fallout from the lack of a meaningful debt reduction plan once again took a heavy toll on the markets last week. The health care sector index ($XLV) plunged down 6.8% last week, on the back of a 4.1% drop the prior week. Of the approximately 300 stocks in the healthcare sector (except the biotech and general pharmaceuticals group which were covered separately), thirty-three stocks trading above $1 at closing on Friday, August 5th, went down more than 15% during the week and two went up more than 15% during the week (see Table). The fall in the healthcare sector index mirrored the overall weakness in the broader markets as the indices plunged 7%-8% last week on the back of a 4% dive the prior week.

As an investor, it is imperative to keep a cool head, especially in such turbulent times, and keep scouting for new opportunities while keeping an eye on both the price movements and news flow. This article covers our analysis of the top movers in the healthcare sector (ex-Biotech) last week. Of the thirty-five stocks that moved more than 15% up or down last week, we analyzed them to determine if they would continue in the same direction, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis.

HCA Holdings Inc. (NYSE:HCA) and Health Management Associates (NYSE:HMA): HCA is an owner and operator of 151 acute care hospitals in the U.S. and England, and HMA operates 59 acute care hospitals primarily in non-urban communities in the southern U.S. Both were down huge last week, and on Monday as it seems almost certain that the debt/budget negotiations will lead to a reduction in Medicare spending. Under the debt deal announced a week ago, either the two parties in Congress work out a deal, which is certain to include Medicare cuts as Republicans are unlikely to agree on a deal without cuts in entitlement programs; or spending reductions, including Medicare payments to healthcare providers automatically take effect if there is no deal. The entire healthcare services industry, including not just acute care providers such as HCA and HMA, but also other hospitals and nursing home centers, health insurers, and even medical equipment companies got a rude awakening last week to that reality. While shares appear cheap with HCA trading at a forward 6 P/E and HMA at forward 8 P/E at Monday’s close, the environment is too uncertain and risky to play them (buy or sell) right now.

Buy Sequenom Inc. (NASDAQ:SQNM): SQNM develops diagnostic testing and genetics analysis products for pre-natal diagnostics, oncology and infectious diseases. The company has developed its proprietary high-throughput, cost-effective MassARRAY system for various DNA/RNA applications, including genotyping, detection of mutations, and quantitative gene expression analysis. Its shares were down 16.9% last week, and they dropped another 8.9% on Monday. The slide started after the company reported on Thursday after market-close that it missed revenue and earnings estimates in the June quarter, reporting $13.3 million and 21c loss versus the analyst estimates of $13.6 million and 17c loss. We believe the steep plunge is an over-reaction. The company continues to increase revenue and cut losses, and it is getting ready to launch its non-invasive T21 molecular diagnostic test for Down Syndrome . The Down Syndrome test has the potential to be a huge blockbuster diagnostic test, a watershed event for the company that can make it or break it. As such, we believe that a slight miss in earnings in the current quarter should be non-consequential, given that the launch timeline for the Down Syndrome test is unchanged. With the stock currently in free fall, we would buy SQNM in stages to take advantage of any further weakness in price.

Buy Neoprobe Corp. (NEOP): NEOP is engaged in the development and commercialization of gamma-guided surgery products for the diagnosis and treatment of cancers. It is actively developing two radiopharmaceutical agent platforms, Lymphoseek® and RIGScanTM CR, to help surgeons better identify and treat certain types of cancer. Furthermore, NEOP's subsidiary, Cira Biosciences, Inc., is also advancing a patient-specific cellular therapy technology platform called ACT. Its shares were down 20.2% last week, and they dropped an additional 14.8% on Monday. There was no significant news that could have triggered the slicing of share price by almost half, and shares currently trade at long-term support levels in the $2 range. Furthermore, the company plans to submit a new drug application to the Food and Drug Administration for Lymphoseek® in the next month, the prospects for which improved recently, as we explained in a prior article, when the FDA recently approved the use of a competing sulfur colloid product.

Affymetrix Inc. (NASDAQ:AFFX): AFFX engages in the development, manufacture, sale, and servicing of consumables and systems for genetic analysis used to monitor gene expression and investigate genetic variation for applications in the life sciences and clinical healthcare markets. The company offers integrated GeneChip microarray platform that includes disposable DNA probe arrays (chips) consisting of nucleic acid sequences, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. The stock dropped 15.6% last week, and it dropped an additional 13.2% on Monday. There were no new news catalysts triggering the fall. However, the company issued a disappointing June quarter guidance in early July followed by an even more disappointing June quarter report on July 27th in which they reported a higher than expected loss (5c versus 4c) and declining revenues across almost all business lines. It appears that shares have been collapsing under their own weight in the last week in a bad tape, as there are no buyers given the lack of any positive near-term catalysts. At its $4.14 closing price, AFFX now appears to trade close to fair value, but we would not be buyers here as shares are probably going to remain range-bound in the $4-$5.50 range in the near-term.

Vivus Inc. (NASDAQ:VVUS): VVUS is a biopharmaceutical company developing therapeutic products, including Qnexa in Phase 3 trials for obesity and in Phase 2 trials for type 2 diabetes; Avanafil, a PDE5 inhibitor drug candidate; Luramist in Phase 2 development for the treatment of hypoactive sexual desire disorder in women; and MUSE (alprostadil), a first generation therapy for the treatment of erectile dysfunction or ED. The stock was down 17.4% last week, and it was down an additional 7.4% on Monday. VVUS reported last Monday after market-close that it missed June quarter earnings, reporting 20c loss versus the estimate of 13c. While the miss was not that significant, and would probably have had limited price impact, the shares were down steeply post-report last week due to the weak tape.

Sell Hansen Medical Inc. (NASDAQ:HNSN): HNSN is a developer of medical robotics for accurate positioning, manipulating and control of catheter and catheter-based technologies. It focuses on electrophysiology procedures for the diagnosis and treatment of patients, who suffer from abnormal heart rhythms, or arrhythmias, such as atrial fibrillation. The Sensei system is compatible with fluoroscopy, ultrasound, 3D surface map & patient electrocardiogram data & was cleared by the U.S. Food & Drug Administration in May 2007 for manipulation & control of certain mapping catheters in Electrophysiology procedures. The stock was down 26.6% last week, and it was down an additional 20.2% on Monday. There is no recent negative news on the company to account for the swoon; however, the company did report on Wednesday last week after the market-close that for the June quarter, it beat revenue and earnings at $5.3 million and 16c loss versus the estimate of $5.1 million and 18c loss. We issued a sell on HNSN earlier in our coverage of daily movers on Wednesday morning; while shares after the nearly 35% haircut since we issued a sell less than a week ago are now priced at more attractive levels, we would still avoid them and stay on the sidelines for now.

Buy Bruker Corp. (NASDAQ:BRKR): BRKR develops life sciences and materials research systems based on x-ray, mass spectrometry, and spectroscopy technologies. It operates in two segments, the life science and analytical systems segment, and the international advanced superconductor segment. Its shares were down 22.1% last week, following by an additional 6.8% drop on Monday. We issued a buy on BRKR after it reported a good June quarter on Wednesday last week before market-open, and indicated that it would be prudent to buy small and buy in stages to take advantage of any further weakness. We stand by that, and believe the current downturn gives you an opportunity to pick up shares in this high growth, innovative healthcare company at lower prices.

Besides these, some other healthcare stocks that have also been taking a deep dive in the last week, based on the sudden prospect of a virtual certainty that there will be some rather steep Medicare cuts in the near future, include the following:

  • Acute care hospital companies such as Community Health System (NYSE:CYH), Universal Health Services Inc (NYSE:UHS) and Kindred Healthcare Inc. (NYSE:KND).
  • Skilled nursing home companies such as Skilled Healthcare Group (NYSE:SKH), Sunrise Senior Living (SRZ), Sun Healthcare Group (NASDAQ:SUNH), and Brookdale Senior Living (NYSE:BKD), which in addition to the prospects of future Medicare cuts are already reeling from a recent announcement of a net 11.1% cut in Medicare reimbursement to skilled nursing home facilities.
  • Outpatient and home care providers such as Gentiva Health Services Inc. (NASDAQ:GTIV), Healthsouth Corporation (NYSE:HLS) and Amedisys Inc. (NASDAQ:AMED).
  • Managed care providers such as Healthspring Inc. (NYSE:HS), Amerigroup Corp. (AGP), and Health Net Inc. (NYSE:HNT).


(Click to enlarge)

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.