4 Stocks Take a Hit From Medicare Cuts

Includes: ENSG, KND, SKH, SUNH
by: Brian Nichols

Monday August 1, saw a significant plunge in stocks affected by government cuts to Medicare. I understand that cuts have to be made in order to sustain our way of life, but it seems that taking 11.1% from Medicare payments to health care facilities is a high price to pay when there are so many areas of federal funding. ( See "How Congress Spends Your Money," a site I found very interesting.) Below are stocks that fell Monday and that may continue to see long lasting effects from federal cuts.

Kindred Healthcare (NYSE:KND) got hammered with a loss of nearly 30% August 1, after President Obama announced Medicare cuts. The cuts are assumed to affect the service providers but not the actual benefits. The Center for Medicare & Medicaid Services announced a net cut of 11.1% in reimbursement rates to nursing facilities. Kindred had seen revenue, assets, and EPS all increase over the last year. The stock has now dropped over 40% since July 7, which shows investors have been dumping shares in possible fear that cuts may come within this industry.

Kindred trades with a price to earnings ratio of only 8.41 with an EPS of 1.58, which means the losses may be short lived. Some other companies such as Skilled Health Care Group (NYSE:SKH), Sun Health Care Group (NASDAQ:SUNH) and The Ensign Group (NASDAQ:ENSG) also felt the effect of the new government cuts.

Skilled Healthcare (SKH) announced 2nd quarter results showing that profit had more than doubled. Monday should have been a day in which the stock saw large gains to reward the company for its strong quarter; Instead the company saw a loss in excess of 40%. The stock is currently trading with price to earnings over 100, which means the stock has a lot of room to fall. I expect it to see more of a decline during the next few weeks.

Sun Healthcare Group (SUNH) saw its stock plunge more than 50%, where it stayed for most of the day August 1. The stock has a small market cap of only $84.06 million, but is still profitable with an EPS of .20. Cuts such as this can hurt a company this size, which has reported more in revenue since 2006 but kept profit margins low. I could see these cuts having a big impact on this stock since it is barely profitable.

The Ensign Group (ENSG) is in the best position for long-term growth. The stock trades with a PE of only 10.70 and with an EPS of 2.06. The stock only lost 22%, which is modest in comparison to the others we have mentioned. Even with the 22% loss the company has still posted gains of 22% in one year. With a low PE, a consistent dividend, and solid financials a 22% loss may prove to be a good buy point. The stock has increased in revenue, EPS, Net Income, and Assets since 2006, with a large margin. I believe this stock is properly adjusted to the news that was released and will continue its uptrend from this point.

This news may very well have long-lasting effects. Investors do not want to stay in a company or sector that is losing revenue and company executives will have to make tough decisions on how to cut costs, which may include layoffs. The situation is bad for investors and the companies alike. However, cuts had to be made to control the deficit. It's just a shame that it must come in this field. There are many other areas in which I, along with others, would have liked to see government cuts before Medicare payments. More decisions will have to be made, other industries will be affected and we may see a pullback from other companies who rely on government funding.

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