2 beneficiaries of health care labor shortages
Undervalued shares of health care facilities and managed care companies may be good investment options amid labor challenges in the broader sector, according to Fidelity’s Justin Segalini.
Although labor pressure has had a meaningful impact on earnings for companies in the health care providers and services industry, Fidelity’s Justin Segalini sees opportunities to take advantage of the challenging backdrop.
“I see areas of the industry that could remain resilient—and could even benefit from labor pressure,” says Segalini, portfolio manager of Fidelity® Select Health Care Services Portfolio (FSHCX).
The health care sector’s labor-supply shortage was fueled by the COVID-19 pandemic in two ways, he says. First, when COVID-19 hit, many providers shed workers or encouraged early retirement to rationalize costs in an uncertain economic environment. Second, each COVID-19 wave led to a temporary worker shortage due to government-mandated quarantine periods, in addition to clinician burnout stemming from the need for healthy workers to put in more hours.
Looking ahead, Segalini believes the COVID-related labor shortage won’t last forever. Meanwhile, he’s investing in opportunities he thinks could benefit the fund.
“In particular, I think the valuations of some health care facilities are overly discounting the magnitude or durability of the labor shortage,” Segalini says. As a result, he recently increased the fund’s exposure to firms such as Oak Street Health (OSH), HCA Healthcare (HCA), and Surgery Partners (SGRY)—all sizable holdings as of November 30.
Segalini says another outcome of the labor shortage—and potentially higher labor costs to attract workers—is an expectation of rising health insurance premiums, as the increased costs to care for patients gets passed on to companies and individuals.
“Inflation is actually a net positive for managed care stocks,” Segalini notes, explaining that managed care firms can reprice about two-thirds of their customers yearly, passing on the increased costs.
At the end of November, large managed care providers held in the fund included UnitedHealth Group (UNH), Humana (HUM), and Centene (CNC), all of which were among its top holdings.
For specific fund information, including full holdings, please click on the fund trading symbol above.
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