“Affordability” may be the most dreaded word in America’s political vocabulary.
One of the biggest factors that led to Donald Trump winning the presidency in 2024 was voter angst over the rising cost of living… and one of the biggest factors dragging his polling numbers down today is voter angst over the rising cost of living. It seems to be an intractable problem that no one has been able to solve.
Nowhere is this more evident than in the cost of health insurance. The employer-sponsored health insurance premiums rose by 6% last year, reaching nearly $27,000 per family. Given that the median family income was a little over $80,000, that is a ridiculous amount of money to pay for health insurance.
Trump knows that the key to winning the midterm elections is doing something about the affordability crisis, particularly in healthcare. So, he’s squeezing the most obvious targets: health insurance and pharmaceutical companies.
The Trump Administration made a splash last week by proposing an average rate increase of 0.09% in payments to private insurers next year for the Medicare Advantage plans they manage. That announcement alone was enough to send the shares of the major Medicare Advantage insurers like Humana (HUM) and UnitedHealth (UNH) down more than 20%.
Of course, this is just the latest move.
The Trump administration has aggressively pushed manufacturers to lower prices through mechanisms like “most-favored-nation” benchmarking, which brings U.S. prices down to the levels paid by other developed countries. And Medicare has been much more aggressive in negotiating lower prices on high-cost medications. As a general rule, private insurance companies tend to base their pricing on Medicare’s benchmarks, so the reductions should flow through.
Will any of this actually result in better healthcare at lower prices?
We’ll find out soon enough. But the trend is clear. The healthcare industry as a whole is in the crosshairs. It’s a political punching bag, and until healthcare inflation moderates, that’s not likely to change.
When I see sentiment this rotten towards a sector, I like to see if the proverbial baby has been thrown out with the bathwater. I look for opportunities to buy strong companies on the cheap.
So, with all of that as background, let’s do a deep dive into the healthcare sector.
A Peek Under the Hood
One thing is immediately clear. The healthcare sector as a whole really is a minefield, and we can see this in their Green Zone Power Ratings. A majority of the stocks in the health sector – 30 out of 59 – rate as “Bearish” on my system and another 14 rate as “Neutral.”
Only about a quarter, at 15, rate as “Bullish.”
Still, even while the sector as a whole is a trainwreck right now, a quarter of the stocks still rate as “Bullish.” So, there might still be some gems in the rough for us to discover.
Let’s keep digging!
Where Do Healthcare Stocks Pick Up Points?
Healthcare stocks rate exceptionally well on quality today, with 54 out of 59 rating as “Bullish” on that factor.
My quality factor is based on various measures of profitability and on balance sheet strength. In a more benign political climate, I’d consider a high quality score to be fantastic news.
Of course, in the current political climate, high profitability in the the sector is an invitation to further scrutiny. Every dollar in profit means another dollar added to your drug costs or insurance premiums.
After quality, the “Bullish” factor scores really start to drop off. 27 rate as “Bullish” on growth and another 22 and 20 rate as “Bullish” on volatility and momentum.
Only rate as “Bullish” on value, and even this might be overstated because value metrics are always backward looking, based on historical earnings, sales and other metrics. If the industry has lower margins to look forward to due to government pressure, then the stocks may not be quite as cheap as the historical figures would suggest.
Only the Best
So, returning to our question…
Is there anything in the sector that is investable right now?
Absolutely!
To start, biotech looks good in this market, and my system confirms it. Because biotech companies operate in the early to mid stages of drug development, they face less regulatory scrutiny than “Big Pharma.” Uncle Sam can squeeze the larger companies into price concessions. But the government has no interest in killing the pipeline of new drugs.
My Infinite Momentum system has been allocating my readers to biotech for months and particularly since December. One biotech position that has been in the portfolio since August is up a very healthy 44%… and I expect more gains to come.
Today, I wanted to run a screen for the very best of the best. So, I made a list of healthcare stocks that rate as “Bullish” on each of my five major factors.
This narrowed down our list to two stocks:
Biotech firm Incyte Corp (INCY) warrants some additional research. Incyte discovers, develops, and commercializes small-molecule drugs, primarily in oncology and inflammatory diseases. It rates strongly across all factors and particularly strongly on quality, where it rates a perfect 100.
HCA Healthcare (HCA) is also interesting. HCA is one of the largest hospital and healthcare services companies in the United States. As the owner of hospitals and surgical centers, HCA operates the physical healthcare infrastructure where care actually happens.
HCA rates strongly across the board with “Strong Bullish” ratings on its volatility and growth factors.
While HCA has thus far managed to avoid the government’s wrath, it does ultimately depend on Medicare and insurance reimbursements for a significant portion of its revenues. So, that’s a risk you’d want to take into consideration.
To good profits,
Adam O’Dell
Editor, What My System Says Today
P.S. I’ll be going LIVE this Thursday afternoon at 1 PM EST with a very special “beat the market” workshop!
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