Shares of healthcare providers stocks and the iShares U.S. Healthcare Providers ETF (NYSEArca: IHF), the largest exchange traded fund dedicated to this corner of the healthcare sector, have recently been drubbed as market participants worry about the specter of Medicare For All.
Politics is at play in weighing on IHF. The ETF has tumbled more than 5% over the past week, essentially erasing all of its 2019 gain. Many of the most visible Democratic contenders for that party’s 2020 presidential nomination are embracing Medicare For All.
Those headlines are plaguing stocks such as Dow component UnitedHealth Group (UNH), Cigna (CI) and CVS Health (CVS). That trio combines for over 27% of IHF’s weight. Some analysts believe the recent dip in these names provides a buying opportunity.
“We raised our fair value estimate for UnitedHealth to $300 per share from $218, largely driven by our moat upgrade and more optimistic longer-term assumptions for the franchise,” said Morningstar in a recent note. “We think UnitedHealth is uniquely deserving of a wide moat rating because of the cost advantages and network effects embedded in the largest private health insurance organization nationwide. Unrivaled scale allows UnitedHealth to price its insurance book commensurate with the lowest cost per insured member of the companies we cover, which has led to industry-leading gains in membership over the past five years.”
Things Can Get Better IHF ETF
With the split Congress, some market observers thought things would be better in 2019 for IHF and its components as material alterations to Obamacare would be off the table.
With the Democrats taking over the House of Representatives and Republicans widening their majority lead in the Senate, Congress won’t be able to take another stab at overturning the 2010 Affordable Care Act, which extended health insurance cover to millions of previously uninsured Americans.
While Medicare For All remains a potential headwind, some other IHF components merit consideration in addition to UnitedHealth.
“We think Cigna’s merger with Express Scripts has created an organization that deserves a narrow moat rating. As a result, we raised our fair value estimate to $231 per share from $160. While we think the combination of medical and pharmacy benefit management is strategically sound, underpinning our positive trend rating, integration execution will be critical for continued stock outperformance from here,” according to Morningstar.
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