A decision of health-care policy and stocks featured prominently at Barron’s recent Midterms and Markets roundtable. The consensus: Potential electoral results could favor the outlook for policies beneficial to a wide range of hospital, pharmaceutical, and other health-care-related companies.
Our policy experts are Libby Cantrill, head of public policy at Pimco; Dan Clifton, head of policy research at Strategas Research Partners; Abby Joseph Cohen, an advisory director at Goldman Sachs; and Ben Phillips, chief investment officer at EventShares, sponsor of the EventShares U.S. policy Alpha ETF, an actively managed ETF focused on long-term policy catalysts.
Q: If the Democrats win control of both chambers of Congress in November, they presumably will win more state races, as well. What would this mean for the markets?
A: Dan Clifton: A big Democratic win would allow for greater Medicaid expansion in populous states such as Wisconsin, Michigan, and Florida. There are many opportunities for the Affordable Care Act to be expanded at the state level, which would be good for the so-called ACA trade. That includes Medicaid health-maintenance organizations such as Centene (CNC), WellCare Health Plans (WCG), and Molina Healthcare (MOH). Hospital operators such as HCA Healthcare (HCA) and Tenet Healthcare (THC) also would benefit, as would health-care equipment suppliers such as Becton, Dickinson (BDX), Cerner (CERN), and Dentsply Sirona (XRAY). The relative performance of all these stocks is tied to the growth rate of health-care spending at the federal and state levels.
Ben Phillips: In the EventShares U.S. Policy Alpha ETF (PLCY) portfolio, we have been buying WellCare, Molina, and Centene, and Encompass Health (EHC) and Teladoc Health (TDOC). Almost regardless of the midterms outcome, we feel confident of an expansion of Medicare and Medicaid spending.
Q: Wouldn’t these stocks be hurt if the Republicans score big wins and try again to roll back the ACA?
A: Phillips: Repealing the ACA is a low-probability event. We’re not positioning for it.
Clifton: If the Republicans keep the House and Senate, down-ticket gains for the Democrats could be much more muted. Thus, opportunities for Medicaid expansion won’t be great. But the market is telegraphing something different: Health-care stocks have really begun to outperform. Teladoc has more than doubled this year. Phillips: Teladoc’s market should quintuple in the next five years. The market is just waking up to the opportunities for telemedicine (virtual health-care delivery via telecommunications technologies). Dropping off investors’ radar, and the policy radar, has helped the health-care system take a breather. It has helped insurers price policies correctly again. It is helping companies earn more stable and visible profit margins. The stocks are working again because the industry has a more stable operating environment than it has had in years.
Why health-care became a leader
Abby Joseph Cohen: Also, these companies are domestically oriented. There has been a sharp divergence since the February/March period, when trade rhetoric ramped up, between the performance of stocks linked to domestically generated revenue and those tied to international trade. The latter have underperformed the S&P 500 (.SPX) by more than 10 percentage points.
Clifton: The president released his drug-pricing plan in May. You’re going to see new pharmacy-benefit-manager rules coming soon that clamp down on, if not eliminate, drug-company rebates to PBMs to give preferred formulary placement to certain drugs. It is interesting that the administration is rolling these rules out before the midterm election. It is almost as though they are hedging the risk of a Democratic sweep, as lower drug pricing is a Democratic issue. If the Democrats win, it will probably be negative for the pharmaceutical industry.
Phillips: We bought AmerisourceBergen (ABC) in the second quarter. Policy risk was already priced into the drug distributor’s shares, in our view.
Q: What is the lowest-risk, highest-return probability in health care?
A: Clifton: Life-sciences tools companies. The industry is levered to spending by the National Institutes of Health. The Democrats will trade higher defense spending for a higher NIH budget. Thermo Fisher Scientific (TMO), Illumina (ILMN), and Danaher (DHR) are trading at all-time highs. They are trading on expectations of a divided government.
Libby Cantrill: The casualty, of course, will be the U.S. budget deficit.
|For more news you can use to help guide your financial life, visit our Insights page.|