Last year was a roller coaster ride for healthcare industry, but overall the sector showed resilience and was able to post a positive performance. The SPDR S&P Health Care Services ETF (NYSEARCA:XHS), which tracks the performance of companies in healthcare services, healthcare facilities, managed healthcare and healthcare distributors gained 20.5% while the S&P 500 rose by 16.6%.
Healthcare spans a number of subsectors ranging from hospitals and nursing homes to pharmaceuticals companies, health insurers and more. Despite belonging to the same broad industry, some of the factors that favor one subsector works against another subsector. For instance severe flu reported this season should drive up patient visit and volumes for hospitals, would cause high claim expenses for health insurers.
Q4 Flash Back
Tax reform should provide an upside potential across all the subsectors. In the healthcare space, healthcare services is one of the most-taxed industries at 30.2%, according to Credit Suisse, and would be a huge beneficiary of reduction in corporate tax rates compared with pharmaceutical and medical device companies that sell their products overseas. One of the health insurer leaders UnitedHealth Group Inc. (UNH) enjoyed a non-cash benefit of $1.22 per share from the revaluation of its net deferred tax liability, as a result of the recent tax reform.
An aging population and improving macroeconomic conditions is expected to lead to further increase in demand for healthcare services. Rising enrollment and top-line growth, development of ancillary business, product modifications, improved service, expansion of international operations, better claims handling, growth of new business units, mergers and acquisitions, and a strong capital position will aid earnings as well.
Additionally, 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.
Despite being saddled with strict regulatory shackles, the sector made several inroads and reshaped business lines to emerge a winner.
Some Attractive Bets
There are some stocks that look attractive for investment and are expected to report a significant uptick in Q4 earnings.
These stocks have a positive Earnings ESP - our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. These stocks also have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Universal Health Services (UHS), through its subsidiaries operates behavioral health facilities, acute care hospitals and ambulatory centers throughout the United States, the United Kingdom and Puerto Rico. Universal Health Services has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending December 2017 on Feb 27, 2018. The company has an Earnings ESP of +1.34%.
Community Health Systems (CYH - Free Report) is a leading operator of general acute care hospitals in communities across the country. Community Health Systems has a Zacks Rank #3 (Hold). The company is expected to report earnings results for the quarter ending December 2017 on Feb 19, 2018. The company has an Earnings ESP of +6.46%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Medpace Holdings (MEDP - Free Report) provides Phase I-IV clinical development services to the biotechnology, pharmaceutical and medical device industries. The company has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending December 2017 on Feb 26, 2018. The company has an Earnings ESP of +0.43%.
Select Medical Holdings (SEM - Free Report) operates specialty hospitals and outpatient rehabilitation clinics that offer long-term acute care hospital services, inpatient acute rehabilitative hospital care services, physical, occupational, and speech rehabilitation service.
The company has a Zacks Rank #3 and is expected to report earnings results for the quarter ending December 2017 on Feb 22, 2018. The company has an Earnings ESP of +1.33%.