Supreme Court Gives Healthcare Stocks a Booster Shot

The high court's ruling especially bolsters the bull case for hospital stocks

As expected, a big slice of of healthcare stocks blasted higher after the Supreme Court upheld a key provision of the Affordable Care Act, ensuring the survival of the federal program that adds millions of paying customers to the industry.

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The high court green-lighted public subsidies to support healthcare exchanges, so naturally the biggest winners were in healthcare services and the health insurance industry.

Not long after the news broke, HCA Holdings (HCA), Community Health Systems (CYH), Tenet Healthcare (THC) and Universal Health Services (UHS) jumped anywhere from 8% to 15% in midday trades.

Health insurance stocks also got a lift, albeit not as dramatically. Humana (HUM) was the biggest beneficiary, up more than 6% — though much of that also came on reports that M&A talks with Aetna (AET) had heated up. UnitedHealth Group (UNH), Centene (CNC) and Aetna were up 2% to 3% in midday trading, while Cigna (CI) and Anthem (ANTM) rose fractionally.

Shares in the industry were already benefiting from a frenzy of mergers and acquisitions. With this challenge to the ACA now out of the way, it’s a good bet we’ll see even more deals get inked.

Healthcare Stocks Keep Going Strong

Taking a step back from hospital and health insurance stocks, there was a pretty good bull case for healthcare stocks in general long before the ACA. After all, powerful demographic forces have been a tailwind for these names for some time now.

The aging of the baby boomers — that cohort of roughly 80 million Americans entering their retirement years — is a well-known driver of healthcare stocks.

Less expected was that this demographic pressure would combine with a huge expansion in health insurance coverage, as well as record healthcare spending.

Another tailwind is consolidation. The insurance sector isn’t the only area of M&A. Biotechs, pharmaceutical companies, medical device companies and more are actively partnering up.

Amazingly, even with the uncertainty of the impending Supreme Court ruling — a decision that could have killed the ACA — healthcare stocks are still the leading sector of the S&P 500 this year.

Indeed, the Health Care SPDR (XLV) is up 11% on a total return basis for the year-to-date. S&P’s equal-weighted version of the index is doing even better, with a total return of 13% so far this year.

The broader market, meanwhile, has generated a total return of less than 4% year-to-date.

If broad bets on healthcare stocks could do so well despite the uncertainty of the Supreme Court’s impending ruling, it’s a good bet that this sector-wide bull market has room to run.

That said, it wouldn’t be unusual to see today’s winners give up at least some of their Tuesday gains in the days ahead. That’s just how trading works. Valuations are also a concern. With so much upside already baked in, it’s getting harder and harder to find bargains in the healthcare sector.

However, a major political risk has been removed from investing in healthcare stocks. And for that, investors should be grateful.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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