Zacks senior healthcare analyst
Chris Kallos was on hand recently to discuss how the healthcare sector has performed thus far this year. More importantly, we also touched on what is expected from his coverage in the near future.
How have health care stocks performed in general through the first half of this year? Or do you take it industry-by-industry?
Healthcare stocks are not homogeneous and, although related, are best compared at an industry level. Managed care, medical practitioners and hospital operators all represent distinct markets within healthcare.
Notwithstanding the stellar performance of specialty pharmacy services provider Bioscript (BIOS), which benefited from further industry consolidation and takeover speculation, managed care as a group delivered the strongest performance in the first half of 2007 relative to other healthcare stocks. Year-to-date, the managed care sub-sector as a group has delivered average gains of 14% compared with a rise of approximately 7.2% in the S&P 500 index for the same period.
What are your expectations ahead of Q3 earnings?
With respect to managed care, 2Q07 results were characterized by generally higher-than-expected medical benefits ratios across the board, despite signs of moderating medical cost trends earlier in the year. We expect to see further deterioration of this key metric, driven by intensifying competition and reluctance of players to increase premium prices in line with health cost inflation, along with the weakening of the U.S. economy.
Did the half-percentage-point interest rate cuts have any direct bearing on stocks in your coverage?
Not directly. The rebound in stock prices following the interest rate cut largely reflected the broader market dynamics rather than any fundamental issue.
What is expected from these industries through the end of 2007 and into 2008?
Notwithstanding further consolidation of select niche areas of the healthcare sector, we expect the key drivers of second half of 2007 performance to be state of the overall economy, with the election-related healthcare news gaining pace and influence in 2008.
If you had to name your top few Buy recommendations at this time, which stocks would they be?
We continue to rate Wellpoint (WLP) as a Buy given its broad product offering, geographic reach, and potential for added synergy gains from recent acquisitions. Matria Healthcare (MATR) is also rated a Buy at current levels.
Chris Kallos is a senior analyst covering the healthcare sector for Zacks Equity Research.
