investing

Hospital Stocks Rally on Failed Obamacare Repeal

The demise of an attempt to eliminate and replace the Affordable Care Act is good news for hospital operators.

The collapse of GOP efforts to repeal Obamacare will cut across many sectors. Whether it's good news or bad news depends on which stocks you own. Some parts of the health care industry would have been hurt by the passage of the American Health Care Act (AHCA), the Republican alternative. But no group of stocks has rallied in relief like hospital operators. Here are two hospital stocks to consider buying after the death of the AHCA, and one to ignore:

Tenet Healthcare (symbol THC)

Shares in the hospital company jumped as much as 8% in early trading before settling down to more modest gains. There were reasons to be optimistic about Tenet even before repeal and replace failed, so these gains have a chance of sticking.

The company's acquisitions of three other health care providers in 2015 have exceeded expectations. UBS analyst A.J. Rice rates shares at "buy," citing the company's focus on smaller projects with faster payback. The analysts' target price of $24 implies a gain of 29% in the next 12 months or so.

Analysts note that even if the AHCA passed and did away with public health care exchanges, it would have hurt the company's admissions by only about 1%.

Universal Health Services (UHS)

Shares in Universal Health Services rose as much as 5.4% quickly after the opening bell on Mar. 27, after the failure of the AHCA prompted some analysts to upgrade their ratings.

Japan's Mizuho Equity Research upgraded UHS to "buy" from "neutral" (hold, essentially) now that it has moved into a "nicer, friendlier neighborhood, one that includes continuation of the important benefit of the Medicaid expansion and without a near- or medium-term threat of block grants."

With the overhang of changes to the health care system removed, the analysts say the stock is undervalued based on its strong volume of patients and free cash flow generation. Of the 11 United Health analysts followed by Zacks, seven recommend it as a strong buy, while four say it's a "hold."

Community Health Systems (CYH)

Shares in Community Health jumped as much as 6% after the Mar. 27 opening bell. It was just the latest boost for a stock that is having a good year after a prolonged series of woes. In the last 3 years, Community Health has been forced to settle with Justice Department over billing practices, been the victim of a hacking attack, and paid $1.9 million to settle a lawsuit brought by a whistleblower.

Although Community Health is rising after the demise the AHCA, some analysts worry the outperformance won't last. Credit Suisse rates shares at "underperform" (sell, essentially), in part because the company is being forced to sell off facilities in order to pay down heavy levels of debt. Rising expenses and tough comparisons with last year's results will also weigh in the stock, Credit Suisse says.

Things could have soured quickly for hospital operators if the AHCA passed the House. The Congressional Budget Office estimated that the measure would result in 14 million fewer Americans with insurance by 2018. An additional 24 million people were to be without insurance over the next decade, CBO estimated. These are the hospital industry's paying customers. Investors here can breathe a sigh of relief.

Make no mistake, however, that the threat to the sector hasn't disappeared completely. Credit Suisse analysts expect to see attempts at incremental changes to ObamaCare instead. "We do not yet have a line of sight into how these potential changes may unfold," writes analyst Scott Fidel.

That means lingering uncertainty. Another risk to keep in mind is that it can be a bad idea to buy stocks when they're rallying. The idea is to buy low, after all. That's not to say that investors should avoid all hospital stocks in wake of the latest developments. But they should be selective.

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