Hospital stocks had another strong run in 2014, posting significant gains as they outperformed investor expectations, thanks in part to the Patient Protection and Affordable Care Act. But the downside of a strong 2014 is that most healthcare stocks now look over-valued, suggested Damien Conover, a director at Morningstar.
Conover, in a recent report, pointed to the rebound in patient volume starting in the second quarter of 2014 as a sign that insurance expansion is increasing healthcare utilization, even amid challenges such as the lingering effects of last decade's recession and more cost-sharing in the form of high-deductible plans.
Although that growth is expected to continue, there are risks that could shake healthcare stocks in 2015, most notably an unfavorable ruling from the U.S. Supreme Court in the King v. Burwell case, which will address the constitutionality of subsidies for insurance bought on the federal marketplace.
The loss of such subsidies could cost a chain like HCA as much as 3.5% of its estimated 2016 earnings before interest, taxes, depreciation and amortization, said A.J. Rice, an analyst at UBS, in a note to clients.
Throughout 2014, publicly traded hospital chains raised their earnings guidance for 2014 as they saw more benefits than anticipated from treating more paying patients, especially in states that expanded eligibility for Medicaid.
Shares of HCA, the largest chain by revenue, reached $75 in late December, setting a new 52-week high. Through Dec. 30, the company's shares had gained 55.5% when compared to the first day of 2014 trading.
Community Health Systems, now the largest chain by hospital count since absorbing Health Management Associates in January, gained 32.8%.
In the attractive behavioral-health space, shares of Acadia Healthcare grew 32.4%, while Universal Health Services, which has both acute-care and behavioral-health hospitals, gained 38.3%.
In comparison, the Standard &Poor's 500 gained 13.6% over the same timeframe. Hospital chains enjoyed a similar run in 2013.
Throughout most of the year, healthcare stocks as group, including the deal-hungry pharmaceutical and biotechnology sectors, traded well above the S&P 500. Mergers and acquisitions, as well as the launch of new high-priced specialty drugs, contributed to the gains.
For healthcare providers in particular, optimism around healthcare reform boosted market caps.
Follow Beth Kutscher on Twitter: @MHbkutscher
