U.S. hospital and health insurance stocks fluctuated and fell with a volatile market on Monday as China's market crash unnerved investors. How much the sector's stocks rebound will depend on whether investors believe they're too pricey in an uncertain market.
The market upheaval that erupted last week continued on Monday. The Dow Jones industrial average plunged 1,000 points after opening and then swung throughout the day. The churn dragged down healthcare stocks, which did better than the overall market over the last week.
Acute-care hospital stocks ended the day down 9.5% from a week ago and insurers were down 9.1% during the same period. That's compared with the 10.3% drop in the Standard & Poor's 500 index and the 11.1% drop in the Nasdaq for the week. So far this year, acute-care hospital stocks are up 5.6% and insurers are up 19.3%, while the S&P 500 is down 8.4% and the Nasdaq is down 4.4%.
Healthcare stocks entered the recent tumult with prices that were higher thanks to strong investor demand in a booming equity market. The sector was an attractive investment, with solid growth as the Affordable Care Act helped millions of uninsured gain coverage through private plans or public programs. Insurers gained new customers and hospitals had fewer unpaid bills.
“Business has gotten better, profitability has grown, but stocks have grown faster,” said David Windley, an analyst who follows health insurers for Jefferies.
Now investors who drove up healthcare valuations in a bull market may not be willing to pay the same premium in light of the turmoil of the last week. “It feels like a painful but a somewhat healthy or needed reset,” Windley said.
The valuations that investors tolerated in a bull market may now feel too risky “given what's happening in the world,” said Frank Morgan, an analyst with RBC Capital Markets in Nashville.
Some hospital operators and insurance companies have had a tougher time than others. As markets closed on Monday, shares of Community Health Systems, Franklin, Tenn., were down 12.1% compared with the prior week. Tenet Healthcare Corp., Dallas, saw shares drop 11.4% during the same period. UnitedHealth Group shares fell 11.4% and Aetna ended Monday down 10.6% compared with a week earlier.
However, the sell-off among healthcare stocks did not change analysts' outlook for the hospital and health insurance sectors.
“The pain has been felt across the market and there are obviously broad, macroeconomic reasons for that,” said Megan Neuberger, an analyst with Fitch Ratings who follows health systems. Those reasons include China's slowing economy and monetary policy and the continued crisis in Greece, which are the types of factors that typically disrupt industrial sectors and commodity markets.
Hospitals that buy back shares to bolster their share price in response could raise credit analysts concerns if they borrow to do so or use capital that could be better spent on investment or acquisitions, she said.
Meanwhile, the latest hospital earnings suggest the financial gains from the Affordable Care Act may have started to taper off, which was “entirely expected,” though it shook investors somewhat, Neuberger said.
Healthcare's hospital and insurance sectors are better able to withstand a rocky market because their demand is less susceptible to economic downturns, analysts said.
“I don't think the volatility in the market today reflects any meaningful change in the six-, 12- or 18-month outlook for the managed-care sector,” Windley said.