3 Hospital Stocks to Buy Now - Analyst Blog

Defensive stocks are becoming an increasingly viable option as markets end one of the longest rallies in recent times. The hospital sector is considered to be a naturally defensive choice. Moreover, Obamacare becoming one of the most important government initiatives over the last few years further strengthens the argument for hospital stocks being good investment options.

Market Rally Halted

The upward trend experienced by the U.S. market seems to have been halted. The S&P 500 closed below its 200-day moving average of 1,905 for the first time since Nov 16, 2012. This is an indicator of whether or not shares have the potential to move upward. Stocks did move upward for 494 days. This is the second longest period of sustained gain in fifty years. The longest such period was from 1996-98, ending with Russia's default.

Investors have indulged in buying over the last few days on every opportunity offered by a dip in share prices. However, rallies have ultimately been short lived since traders have chosen to sell as soon as gains started coming in. The end of a trend of long-term gains has also led to the exit of many investors from the bourses.

The Fed has emphasized again and again that it is in no hurry to raise rates. These assurances come even as the central bank winds down its bond purchase program. However, investors have focused on the weaknesses in the economy, which have caused the Fed to exercise such caution in the first place.

Markets are now looking at company earnings and forecasts to boost the benchmarks. At the same time, global clouds have been gathering on the horizon. Weak data has been emanating from the Eurozone and China, which could impact the U.S. economy in a major way. These factors together indicate that the time could be ripe to hold defensive stocks.

Obamacare Effect

Last month, the Department of Health and Human Services released a report that revealed how Obamacare had helped reduce costs for hospitals. According to the report, uncompensated care costs for hospitals will decline by $5.7 billion in 2014. Uncompensated care costs are expenses which hospitals have to bear which cannot be recovered.

This reduction has happened because a large number of individuals are now covered by health insurance. This means that costs arising out of bad debt or charity care to people unable to pay bills will go down. This added up to around $50 billion for hospitals in the U.S. in 2012.

The report says that $4.2 billion of the reduction in costs will be from states which adopted an expansion in Medicaid while implementing the healthcare act. This includes 27 states as well as Washington D.C. Another $1.5 billion will come from states which opted not to expand the program.

The Medicaid program of Obamacare may be expanded across more states during the fourth quarter of the current year or earlier next year. Hospitals are expected to benefit significantly because of this decision. Earnings delivered by several stocks from the sector have surprised market watchers. Currently, the sector has a Zacks Industry Rank #3.

Our Choices

Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.

HCA Holdings, Inc. (HCA) is a healthcare services company. The holding company, along with its affiliates, operates and owns hospitals and related healthcare facilities. Currently, HCA operates 165 hospitals as well as 115 freestanding surgery centers across 20 states in the US as well as England. Around 4-5% of the total inpatient care provided across the country is delivered by HCA facilities.

HCA Holdings holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 23.9%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.85.

Community Health Systems, Inc. (CYH) owns and operates hospitals primarily in non-urban areas as well as certain urban areas in the U.S. Currently, Community Health Systems operates 207 hospitals across 29 states. Additionally, its subsidiary Quorum Health Resources, LLC offers management and consulting services to nearly 150 independent hospitals.

Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 27.4%. It has a P/E (F1) of 16.93x.

Lifepoint Hospitals Inc. (LPNT) is an operator of general acute care hospitals in non-urban areas in the U.S. Currently, Lifepoint owns more than 60 hospitals across 20 states. In Dec 2011, the company became one of the few organizations to be selected by the Department of Health and Human Services as a Hospital Engagement Network (HEN). This was part of the Partnership for Patients Initiative.

Lifepoint Hospitals holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.3%. It has a P/E (F1) of 21.59x.

Recent market activity suggests that the market is slipping into a downtrend. At the same time, prospects for the hospital sector seem to be improving. Given these factors, adding these stocks to your portfolio would be a prudent choice.