Obamacare - Check out the Market Response

• Date: April 06, 2010
• Source: Admin

The run-up to the U.S. health care overhaul instilled a lot of fear in a lot of people, if some of the incendiary comments from Republicans were any indication. But a day after the House of Representatives voted in favour of a $940-billion (U.S.) bill that amounts to one of the most sweeping changes in the country's health care in decades, the stock market reacted with a collective shrug.

Despite early jitters, the stock market didn't dive and health care stocks in particular weren't torpedoed. Within the S&P 500, health care equipment stocks rose, health care facilities stocks rose, health care distributors rose and pharmaceuticals rose. Managed health care stocks did fall, but by all of 1.1 per cent.

"If Obamacare is such a disaster for the economy, where's the market reaction?" Paul Krugman, the economist and New York Times columnist, asked in a blog.

The reason for the market's response, or lack of? The overall take on this dramatic policy shift comes down to a very simple positive development for most companies in the sector: More people insured means that more people will receive health care treatment. And that means more filled hospital beds (or least more paid-for beds) and more people receiving the drugs they need.

Besides, passage of the bill also removed some uncertainty that had been hanging over many health care stocks in recent weeks - and the stock market never likes uncertainty.

"Broadly speaking, to the extent investors have been uncomfortable investing in health care during the reform debate in D.C., fund flows could now move toward health care," said Tom Gallucci, an analyst at Lazard Capital Markets, according to Dow Jones.

Most of the comments from analysts were remarkably upbeat. Justin Lake, an analyst at UBS, noted that managed health care stocks trade at a valuation of just 10 times estimated 2011 earnings, giving them an "attractive" risk-to-reward profile. Ana Gupte at Sanford C. Bernstein & Co. raised her target price on Aetna Inc. to $39 from $36 and reiterated an "outperform" recommendation.

Legendary Legg Mason fund manager Bill Miller also weighed in, telling Reuters that his fund continued to hold stakes in UnitedHealth Group Inc. and Aetna - feared by some observers to have the most to lose from the reforms because managed care providers will face tighter regulations.

"The political benefits of the health care reform will come first, and the more painful aspects such as higher taxes will come later, so cheaper health care stocks will do better in the next few months," Mr. Miller said.

The initial winners and losers

Winners 

Tenet Healthcare Corp. (hospitals) up 9 per cent

Medtronic Inc. (health care equipment) up 2.3 per cent

Bristol-Myers Squibb Co. (pharmaceutical) up 1.8 per cent

Mylan Inc. (pharmaceutical) up 1.7 per cent

Cardinal Health Inc. (health care distributor) up 1 per cent

Cigna Corp. (managed health care) up 0.6 per cent

Aetna Inc. (managed health care) up 0.5 per cent

Losers 

UnitedHealth Group Inc. (managed health care) down 3.2 per cent

Boston Scientific Corp. (health care equipment) down 2.5 per cent

Source: Globe and Mail, David Berman, Mar. 23, 2010