Healthcare Stocks: 2 Sectors To Avoid Ahead Of 'Obama Care' Supreme Court Ruling

by: Lou Basenese

The U.S. Supreme Court is set to go on vacation Thursday until its next term begins in October.

Before then, though, the Justices are widely expected to issue their ruling on the constitutionality of the Patient Protection and Affordable Care Act, more commonly referred to as Obama Care. pegs the odds of the individual healthcare mandate being struck down at 76%. Mind you, this isn’t just a survey. It’s based on real people betting real money on the outcome.

Combine that with the performance of the S&P 1500 Health Care Index, which has been selling off ever since the start of the Supreme Court case, and it appears investors are in agreement on the most likely outcome.

With that in mind, let’s take a look at the healthcare sectors to avoid if the individual mandate is indeed struck down.

From First to Worst…

Bespoke Investment Group recently conducted an analysis of the 10 industries in the S&P 1500 Health Care Index, breaking down performance over three relevant periods.

  • Period 1 – President Obama’s Election to Passage of Healthcare Law: Ever since taking office, the President made it clear that healthcare reform was a top priority. As such, significant enthusiasm surrounded stocks that would likely benefit from official legislation.
  • Period 2 – Passage of Healthcare Law to Start of Supreme Court Case: The specifics of the legislation made it easier to assess the winners and losers. And the biggest perceived winners rallied the most.
  • Period 3 – Start of Supreme Court Case to Present: The start of the case forced investors to reevaluate their conclusions based on the increasing likelihood that at least part of the legislation would be overturned. After all, the court wouldn’t waste its time on a case without merit.

Here are the most telling findings…

Health Care Technology and Managed Health Care stocks went from first to worst.

Over the first two periods, the sectors rallied 51.5% and 38.17%, then 44.9% and 49.8%, respectively.

Since the start of the Supreme Court case, though, as the likelihood of the individual mandate being struck down increased, both sectors reversed course. They’re down 4.2% and 8.8%, respectively.

This reversal of fortunes is not unsurprising.

The Health Care Technology industry consists of companies involved in offering electronic medical recordkeeping services. That means companies like Cerner (Nasdaq: CERN), Omnicell (Nasdaq: OMCL) and Computer Programs & Systems (Nasdaq: CPSI).

These stocks had been buoyed by the new requirement for electronic health records and the millions of new customers expected as a result of the individual mandate. But those catalysts now appear to be in jeopardy.

The key takeaway: As the individual mandate goes, so goes these companies’ growth prospects.

The most vulnerable stocks in the industry appear to be Allscripts (Nasdaq: MDRX) and Quality Systems (Nasdaq: QSII). I say that based on the most recent performance and earnings.

Both stocks have sunk more than 33% since the start of the Supreme Court case. And both companies reported double-digit declines in profits, while the rest of the competition grew profits in the last quarter.

Moving on to the Managed Health Care industry, the same rationale applies. Despite increased regulatory hassle, the healthcare legislation provided instant growth for companies like United Health Group (NYSE: UNH), Cigna (NYSE: CI), Aetna (NYSE: AET), Humana (NYSE: HUM), Amerigroup (NYSE: AGP) and Magellan Health Services (Nasdaq: MGLN) in the form of millions of new, guaranteed customers.

But once again, if the individual mandate goes away, so does the instant growth for these companies.

Based on recent performance, the most vulnerable Managed Health Care stocks appear to be Centene (NYSE: CNC), Health Net (NYSE: HNT) and Molina Healthcare (NYSE: MOH).

Each is down by more than 31% since the start of the Supreme Court case on March 26, 2012. By comparison, the S&P 500 (NYSEARCA:SPY) Index has fallen only 3.8% over the same period.

Bottom line: Based on the tale of the tape – and the strong likelihood of the individual mandate being struck down – I’d avoid Health Care Technology and Managed Health Care stocks like the plague.