As controversial as it is, the Affordable Care Act (aka Obamacare) does open up some compelling buying opportunities in healthcare stocks.
Under Obamacare, everyone is required to sign up for healthcare or risk being penalized, and this is creating a very healthy environment for several industries.
I’ll get to those industries in a moment, but first, let’s see what forces are at play here:
Healthcare Spending Will Skyrocket
Plain and simple, healthcare spending — and costs — are about to explode. The ACA will add approximately 30 million people to the insurance rolls, driving up the demand for healthcare. And with that increased demand comes increased costs.
According to the Congressional Budget Office, healthcare spending in America will balloon to 22% of gross domestic product in 2038, from 16.4% in 2011. That means that healthcare spending will account for more than a fifth of the economy before long.
All the while, a major demographic shift will ensure that Americans will spend more on healthcare: the aging of America. Every single day, 10,000 new people qualify for Medicare. By 2050, one-fifth of the total U.S. population will be elderly. That is a demographic you can’t argue or legislate away. This group of Americans will need doctor’s visits, medical tests and prescription drugs. So, healthcare will remain a growth industry regardless — or perhaps aided by — the changing political and legislative environment.
So with healthcare spending and costs on the rise — in no small part due to the ACA — a few industries stand to benefit more than others.
Stocks to Buy
First up, I am recommending several pharmaceutical plays in my newsletters — an industry that’s expected to reach $370 billion to $390 billion by 2015.
One such healthcare stock is Regeneron Pharmaceuticals (REGN). Regeneron is best-known for Eylea, a treatment for the “wet” form of age-related macular degeneration (AMD) — the leading cause of blindness in developed countries. At least 2 million Americans suffer from AMD, and thanks to the rapidly aging population, this is expected to increase by 50% by 2020.
Regeneron also recently announced that it plans to file for wider use of Eylea — namely to treat diabetic macular edema (DME) — later this year. Originally, Regeneron was going to wait until 2014, but the clinical trial data was so positive that the company moved its plans a year ahead of its earlier timeline. Outside of Eylea, Regeneron has 11 other antibodies in testing. This all translates into strong sales and earnings potential: Analysts expect REGN to post 28% annual sales growth and nearly 55% earnings growth next year.
It’s a simple fact that pills are cheaper than procedures. The CBO recently estimated that a 1% increase in new prescriptions filled by Medicare recipients results in a 0.2% drop in Medicare spending on medical services. So the ACA is creating a very healthy environment for pharmaceutical companies as patients and organizations alike try to keep healthcare costs down.
I’m also bullish about intermediaries that serve healthcare providers and pharmaceutical companies. Specifically, I’m looking at products and services that allow companies in the sector to reduce costs — whether in information technology, distribution or property management. Because nowadays, any cost-saving measures are essential and in hot demand.
On the IT front, independent experts believe that widespread adoption of modern healthcare software and IT services could cut healthcare costs by $162 billion annually. This is why Congress has provided more than $35 billion in “meaningful use” of healthcare IT incentives, giving a meaningful boost to this industry.
In my Blue Chip Growth newsletter, I’m recommending AmerisourceBergen (ABC). If you’re not familiar, AmerisourceBergen is one of the world’s largest pharmaceutical services companies. The company operates mostly in Canada and the United States, distributing generic, branded and over-the-counter drugs, as well as some medical supplies and other products. Going by analyst estimates, this healthcare stock is headed toward double-digit sales and earnings growth through the end of 2014.
Just recently, ABC’s board approved $750 million in stock buybacks — that’s on top of the $450 million or so it has left on its existing program. AmerisourceBergen also boasts a strong dividend track record. Since 2006, the company has increased its quarterly dividend nearly tenfold. Between its industry leading position, its commitment to shareholders and its earnings prospects, I consider this conservative stock among my top healthcare picks.
I own and recommend pharmaceutical and medical service companies like REGN and ABC, and regardless of what happens with ACA — or perhaps because of it — I will continue to do so throughout the rest of 2013 and beyond.
Louis Navellier is the editor of Blue Chip Growth. As of this writing, he was long ABC and REGN.
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