Are Healthcare Stocks Terminally Ill?

Healthcare stocks - Are Healthcare Stocks Terminally Ill?

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Healthcare stocks took a one-two punch on Jan. 30, and the results weren’t pretty.

First, they got hit with the announcement that three of the top companies in the nation —, Inc. (NASDAQ:AMZN), Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and JPMorgan Chase & Co. (NYSE:JPM) — are teaming up to form an independent healthcare company with the aim of reducing medical costs for their employees. This comes on the heels of AMZN’s move into the pharmacy business last year and a number of hospital groups announcing their plans to join together to start providing generic pharmaceuticals at cheaper prices to their patients and employees.

Second, they got hit during the State of the Union address when President Donald Trump waged war on the high price of pharmaceuticals in the United States as compared to other developed countries around the world.

You can see in the chart below how healthcare stocks like Anthem Inc (NYSE:ANTM) [yellow line], Express Scripts Holding Company (NASDAQ:ESRX) [pink line], CVS Health Corp (NYSE:CVS) [blue line], UnitedHealth Group Inc (NYSE:UNH) [green line] and Cigna Corporation (NYSE:CI) [red line] all pulled back Jan. 30 on the news. But, then again, the entire S&P 500 [candlesticks] was down the same day.

Fig. 1 -- Comparison Chart of Healthcare Stocks

So, is that it? Is the bullish uptrend for healthcare stocks over? We don’t think so.

One thing you have to remember about healthcare stocks is that they have survived and thrived through the many permutations of the attempted repeal of the Affordable Care Act (ACA) and they have continued to soar higher during 2018, even with the removal of the “individual mandate” in the latest tax reform bill.

Sure, free-market pressures from companies like AMZN and JPM are threats that need to be considered, but there is no way that healthcare companies are going to take these threats lying down.

They are going to adapt and respond. It may take some time, and their respective stocks may pull back a little in the meantime, but these market behemoths — with their massive R&D, marketing and lobbying budgets — are by no means terminally ill.

When thinking about the “Amazon effect” and wondering what can happen in an industry when Jeff Bezos sets his sights on it and makes good on his statement that “Your margin is my opportunity,” we need look no further than the grocery-store market when AMZN announced that it would be acquiring Whole Foods. The announcement shook the industry, and stocks of companies like Walmart Inc (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) plunged.

However, even though AMZN is benefiting from the acquisition, WMT is now trading 34% higher and COST is trading 17% higher than it was before the WFM announcement because each company responded and adapted. A strong bull market didn’t hurt either.

Bottom Line on Healthcare Stocks

In a market environment in which stocks are being driven higher by increased merger and acquisition activity, tax-savings and a strong underlying economy, a little competition isn’t going to spell the end for the uptrends we’ve been enjoying. It may spark some profit-taking in the short-term, but don’t count healthcare stocks out just yet.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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