If we can be sure of one thing in 2019, it’s that not all stocks are created equal.
We have seen sectors rise and some of the big names falter all the same. This has certainly been a stock picker’s market.
And I say that knowing full well that the S&P 500 is up an impressive 26% year-to-date.
But healthcare is a tricky sector because it incorporates a variety of stocks — from drug companies to hospitals to insurers to medical device makers. All are on different sales calendars and don’t march in lockstep.
The thing to watch in the sector is how the economy is doing. If people are working then they have more money, and they will use some of that money for healthcare purposes.
As far as legislation that can clear up the direction of the U.S. healthcare system, that is a long way away.
For now, it’s best to stick with only the most powerful stocks the market has to offer — and avoid the weakest. And the doctor is ordering you to banish these seven sickly healthcare stocks from your portfolio, if you’ve got them.
Healthcare Stocks to Sell: Mednax (MD)
Mednax (NYSE:MD) is a Florida-based firm that has been supplying physician services for anesthesia, pediatric specialties and newborns since 1976.
These contract services have been in big demand for a while, as the healthcare landscape was developing under new “Obamacare” legislation.
But those days are passed and healthcare organizations are settling in the current state of limbo. But that means staffing is a bit more predictable and MD’s services are finding fewer customers.
MD has begun restructuring to get back in step with market conditions. Whether that works or not, remains to be seen. But it’s getting downgraded across the board and year-over-year revenue is declining. There’s more downside than upside left for this stock.
Fresenius Medical Care (FMS)
Fresenius Medical Care (NYSE:FMS) has been doing pretty well this year, relative to the category it finds itself in today.
This Germany-based firm specializes in treatment and services for patients with chronic kidney failure and is one of the top providers, along with DaVita (NYSE:DVA). The problem is, while this is a growth sector, especially in the United States, Medicare is tight with its payments, so the margins are low. And solid operating margins are crucial to the profitability standards I set for any investment.
In July, President Donald Trump issued an executive order allowing in-home services for kidney dialysis and other treatments and both sector-leading stocks popped.
But it may not be FMS that is the biggest winner, especially given the fact that its dialysis clinics and home services would initially add to costs. This is ultimately a win for insurers rather than these specialized companies.
The stock is only down 3% in the past year, but it’s up 13% year-to-date, so this performance is showing a downtrend is still in place.
Healthcare Services Group (HCSG)
Healthcare Services Group (NASDAQ:HCSG) is a good example of a middling company in the ancillary services sector of the healthcare industry — including laundry and dietary services for long-term care facilities — that has been struggling between strength and weakness for a while.
It’s a good sector and it is a pretty big name in the industry, having been around since 1976. But the dynamics in this sector are shifting, as the insurance industry would prefer to pay to keep people at home, rather than pay for facilities. The same goes for Medicare.
Struggles with margins have been ongoing. And then in late October, third-quarter earnings hammered the company. While revenue was in line with expectations, earnings missed by almost 10%. That’s not encouraging.
It also means analysts cut their price targets moving forward and institutional investors are looking to move their money, further driving down the stock.
Brookdale Senior Living (BKD)
Brookdale Senior Living (NYSE:BKD) provides senior living communities to more than 75,000 residents. It has been in business since 2005.
During that time, BKD has been able to capture the first wave of baby boomers and the tail end of their parents heading into assisted living facilities. And this market looked like it was going to expand for decades as boomers started filling up these facilities in huge numbers.
Now, real estate is an area I’d consider crucial to my Growth Investor strategy … if the business model is strong. But along the way, technology has shifted this particular trend. In-home care has increased and there is now more care that can be conducted from homes due to advances in equipment.
This means assisted living facilities are under pressure. They proliferated, anticipating a growing base, and now that growth looks to be less than expected. Given the fact that they’ve dumped huge sums in large campuses, this is not the “sure thing” it was five years ago.
There will be growing competition in this sector and Medicare and insurers will have some leverage here, all challenging BKD’s margins in coming quarters, if not years.
HCA Healthcare (HCA)
HCA Healthcare (NYSE:HCA) is a for-profit company that operates hospitals, urgent care facilities, outpatient services facilities and the like.
It was founded in 1968 and comprises nearly 250,000 employees in 21 states, including 38,000 physicians and 87,000 nurses. It’s No. 63 in the Fortune 500.
This isn’t a stock or company teetering on the brink of existence. But it will be in an increasingly challenging sector moving forward.
The graying of America was supposed to be a boon for these types of companies. But the real challenge underneath it all is how Americans pay for all of this increased healthcare.
Insurance companies are not interested in expanding the margins for hospital companies. And Medicare is already under pressure for funding as it is; more people in the system won’t help its generosity.
This is one of those stocks that may not fall significantly, but it won’t rise much either. There are simply better places to put your money to work.
Cigna (NYSE:CI) is one of the leading health insurers in the U.S. and beyond. It has a $75 billion market capitalization and has been around since 1792. Nope, that not a typo, it’s 227 years old.
It bought the first insurer in America — Insurance Company of North America — in a 1982 merger. That’s some serious staying power.
Recently, this sector has been under duress because Wall Street was worried that Democratic presidential candidate Elizabeth Warren was going to destroy the health insurance industry with her Medicare for All health coverage program.
But Warren recently laid out the plan and it looks like such an outcome would be at least three years out if she were to be elected. And that means it would be up for implementation as she ran for a second term, which gives companies even more time.
CI and other insurers were all part of a relief rally. But the fact is, the popularity of Medicare for All isn’t lost on these big insurers. And it’s going to be a tough transition to come up with a better private solution or figure out what to do when the current system transitions. In the meantime, I see much stronger stocks out there.
Encompass Health (EHC)
Encompass Health (NYSE:EHC) provides post-acute healthcare services, such as inpatient and in-home rehabilitation as well as hospice care.
Basically, it’s part of a growth sector that benefits from the graying U.S. population as well as the trend to provide services outside brick-and-mortar corporate facilities.
And its home care services are broader than simply rehabilitation. It provides nursing care as well as physical therapy. Also, its physical therapy division is available to people of all ages that are in need of rehabilitation services.
The trouble is, this sector is in its early days and the industry is undergoing some volatility, given the vague future of U.S. healthcare policy, and thus, how companies can best adapt.
Plus, the enthusiasm for this sector a few years ago has made stocks like EHC relatively expensive, so its valuations aren’t in line with the current state of the sector. Wall Street doesn’t like surprises, and this sector may be full of them in coming quarters.
There are certainly worse stocks out there, but there are also better ones right now.
Why I Like Dividend Growth Stocks Now
If you think what happened in the stock market the last few months is wild, just look at the bond market. We’ve got falling and even negative yields overseas. But as investors retreat to U.S. Treasuries it’s causing bizarre effects here, too. Just look at what happened this summer, when the two-year Treasury actually began to yield MORE than the 10-year Treasury. And even the 30-year Treasury can’t be relied upon for good yield anymore.
So if a stock’s earnings picture is uncertain, not only is it going to be volatile, but people are going to look elsewhere seeking income.
Meanwhile, other stocks not only earn an “A” in my Portfolio Grader, thanks to strong buying pressure and great fundamentals …
The stocks also earn an “A” in my Dividend Grader. These stocks are able to pay great yields — and have the strong business model to back it up.
All in all, I’ve got 29 strong dividend growth stocks for you now in Growth Investor — averaging 4% yields — far more than the S&P 500 or even a Treasury bond. These stocks are poised to do well as we continue to see international capital flow to the U.S. markets. Click here to see how I found these stocks, and how you can get great performance out of YOUR portfolio — come what may.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.