We are in the thick of fourth quarter earnings, with Q4 results on board from 275 S&P 500 members, or 55% of the index’s total membership (as of Feb 3, 2017). The health sector, which is part of the medical sector, has pretty much been in the limelight, being held at gunpoint by the Presidential candidates at the time of campaigning. Also, after the election of Donald Trump, the sector has been in news given his eagerness to repeal the Affordable Care Act, which has blanketed it with considerable uncertainty.
The healthcare sector includes diversified industries like managed care organizations, clinical, laboratories and diagnostics research, medical equipment, hospitals, telehealth providers and more. Within the heavily regulated health care sector — for the managed care industry or the health maintenance organizations (HMOs) — which includes the medical insurance group, the hospital industry and the pharmaceutical industry, one of the biggest developments was the election of Donald Trump as the President of the U.S. For HMOS and the Hospital industry, the ‘repeal and replace’ efforts by Trump has left the players in the lurch. Though nothing of repeal and replace is final and certain, executive orders passed by the President point to the likelihood of putting an end to Obamacare’s individual mandate along with the granting of block Medicaid to the states. Obamacare’s individual mandate aimed primarily at bringing in more individuals under the insurance net, made it necessary for every individual to have health insurance or to pay a penalty. This individual mandate was successful to a certain extent since it helped in reducing the uninsured rate. Trump, however, feels pressing individuals to buy an insurance or to pay a penalty is a burden on them. In case of a repeal, health insurers will stand to lose the enrollment that they would have gained if the individual mandate had remained intact. Also, Trump is mulling over block Medicaid grants to states, which might cause a reduction in Medicaid enrollment. Trump’s victory also sent waves across the hospital industry, which is feared to lead to an increase in uninsured and uncompensated care if provisions relating to the individual mandate and Medicaid expansion are repealed. These players had a good time under Obamacare when they witnessed an increase in insured patients and a consequent decline in bad debt, which is an eyesore. Though these factors have been nagging the healthcare sector, earnings for the HMO players in the fourth quarter are expected to see accretion from higher contribution from the Government business which includes Medicaid and Medicare Advantage. HMO players — UnitedHealth Group Inc. (UNH) and Aetna Inc (AET) — have reported an increase in revenues and membership from the Government business. Also the unprofitable public exchanges business has been bothering the players, especially most of the HMO companies. Most insurers incurred losses from this business in the first nine months of the year and the trend is unlikely to reverse this quarter. Major players incurring losses in this business are further reducing their participation on the exchanges by exiting unprofitable markets. We expect the players in the hospital industry to continue to face a decline in patient admissions as the shift from inpatient facility to outpatient facility accelerates. Moreover, companies are increasingly using capital to build ambulatory-care facilities, physician hiring, information technology and telehealth. Efforts to rein in costs should drive bottom-line growth. Moreover, strong balance sheets and attractive organic cash flow generation, along with excess capital in the form of statutory reserves and parent cash continue to make this sector attractive. Another healthcare sub sector, which provides clinical services pets, is poised for growth as the veterinary market continues to strengthen. Also, healthy competition in the lab market continues to drive growth. Higher demand for veterinary services owing to an increase in pet population, more knowledge and awareness, better medicines for pets, highly trained doctors, more technology, and improved diagnostics have been the catalysts to earnings growth of this sub sector. Diagnostic and laboratory research companies are also slated to see earnings improvement owing to greater healthcare access, which fuels demand for these services. Growth in the industry is influenced by an aging population and rising demand for preventive care and personalized medical treatments. Small medical labs are competing effectively by providing specialized analyses and establishing their presence in regions with fewer medical facilities. How to Pick the Attractive Stocks? Given the large number of industry participants, selecting stocks that have the potential to beat estimates appears to be a daunting task. Nonetheless, our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. Notably, a positive Earnings ESP helps to identify stocks that have high chances of surprising estimates in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Below are five health care stocks that we believe are best positioned to stand out in fourth-quarter earnings season. Molina Healthcare Inc. ( MOH), slated to report on Feb 15, is a multi-state managed care organization that arranges for the delivery of healthcare services to persons eligible for Medicaid and other programs for low-income families and individuals. It has an Earnings ESP of +4% and carries a Zacks Rank #3. You can see . the complete list of today’s Zacks #1 Rank stocks here Tivity Health, Inc. ( TVTY) provides health management services. The company offers services which include chiropractic services, physical therapy, occupational therapy, speech therapy, acupuncture, massage and complementary and alternative medicine services. Its network comprises SilverSneakers, Prime Fitness and WholeHealth Living. It has an Earnings ESP of +2.86% and carries a Zacks Rank #3. The company is due to report fourth-quarter earnings on Feb 23. DaVita HealthCare Partners Inc. ( DVA Quick Quote DVA - Free Report) is the parent company of DaVita Kidney Care and HealthCare Partners. DaVita Kidney Care is a provider of kidney care, delivering dialysis services for chronic kidney failure and end stage renal disease primarily in the United States. HealthCare Partners manages and operates medical groups and affiliated physician networks primarily in California, Nevada, New Mexico, Florida, Colorado and Washington. It has an Earnings ESP of +4.4% and carries a Zacks Rank #3. The company is slated to report results on Feb 9. Allscripts Healthcare Solutions, Inc. ( MDRX) offers clinical software, services, information and connectivity solutions that enable physicians and healthcare providers to deliver patients safety and clinical outcomes in the U.S. Allscripts, which is expected to report results on Feb1 6, carries a Zacks Rank #3 and has an Earnings ESP of +8.33%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.