The 2,700-page Affordable Care Act — President Obama’s signature domestic policy initiative — was intended to provide health insurance to more than 48 million currently uninsured Americans. When the so-called “individual mandate” takes effect in January, virtually all Americans will be required by law to purchase health insurance. Getting into the right health sector investments now can prep investors for profits in 2014.
With open enrollment in state health insurance exchanges set to kick off on Oct. 1, it’s a good time to revisit the brave new healthcare world — and break down four different ways investors can play the opportunity.
Here are four healthcare sector investments to check out now: a mutual fund, an exchange-traded fund, a real estate investment trust and an individual stock focused on a high-growth healthcare niche.
Fidelity Select Health Care
For investors who want to play the official Obamacare kickoff with a mutual fund, Fidelity Select Health Care (FSPHX) is a pretty good choice because it serves up a healthy group of high-growth biotech stocks including Gilead Sciences (GILD) and Amgen (AMGN), plus healthcare IT firms like McKesson (MCK) and Big Pharma players like Merck (MRK).
Fidelity Select Health Care — which has been run by noted fund manager Eddie Yoon since 2008 — is a popular mutual fund, with $3.7 billion in assets under management, and has returned roughly 16% annually for the past five years.
FSPHX has an annual expense ratio of 0.79%, or about $79 per $10,000 invested — that’s lower than the sector average 1.46%.
Health Care SPDR
Another option for investors seeking a bit more diversity across the whole sector is an exchange-traded fund like the Health Care SPDR (XLV).
Many investors enjoy the fact that unlike mutual funds, which are sold at the end of the trading day, ETFs trade over an exchange just like stocks. XLV also is larger than FSPHX, with about $7.4 billion in assets under management.
The ETF is fairly well diversified, with holdings including medical products companies like Johnson & Johnson (JNJ), managed care providers like UnitedHealth Group (UNH), large biotechs such as Celgene (CELG) and pharmacy benefit firms like Express Scripts (ESRX).
XLV has returned roughly 12% annually in the past half-decade and sports a low expense ratio of just 0.18%.
Medical Properties Trust
Medical Properties Trust (MPW) is a real estate investment trust focused on healthcare facilities. MPW’s holdings include nearly 60 properties, including acute care hospitals, rehabilitation hospitals and medical office buildings.
As a REIT, Medical Properties Trust earns special corporate tax advantages, but in return is required to pay out at least 90% of its annual earnings to investors. That results in a big current dividend yield of 6.6%.
Like other REITs, MPW has slumped since July as treasury yields have spiked — it’s down 30% from its high in May. But the tide might be turning.
Last week’s lower-than-expected job growth report gave REITs a bump — MDT hopped up 3% on Friday — but the big opportunity for here is the growth opportunity that Obamacare presents for healthcare REITs in general, and MPW in particular. Although potential cuts in Medicare reimbursements could pose headwinds for hospitals, a broader base of insured patients would reduce bad debt write-offs.
Last month, MPW announced a $283 million deal to acquire three hospitals affiliated with IASIS Healthcare LLC. MPW will spend $2 million improving the properties, then lease them back to IASIS — a win-win for MPW and the hospital group. MPW should thrive over the next few years in an environment where hospitals are seeking out new ways to improve their facilities and free up cash.
MPW currently trades at less than 11 times forward earnings.
It has been a big week for Quality Systems (QSII) — the healthcare information technology provider’s NextGen Healthcare Information Systems unit launched a clinical decision support tool last week, and its customer Willamette Valley Providers announced plans to go live with electronic health records.
Quality Systems, which provides practice management software to doctors and dentists, has high growth potential because providers will need to upgrade manual, paper-based systems to electronic systems.
QSII, which is up a market-beating 23% year-to-date, has a current dividend yield of 3.4%, as well as total cash of $130 million and no debt. Its price to earnings growth ratio of 2.25 is higher than I’d like, but its forward P/E of around 19 compares favorably to rival Medidata Solutions’ (MDSO) multiple of nearly 58.
I think now’s the time to take advantage of QSII’s dip from early August levels.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.