Frugal Consumers Hurt Health-Care Stocks

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Medtronic executives partly blamed reduced health-care spending for the weaker prospects. Speaking to analysts, Medtronic Chairman and Chief Executive William Hawkins said the softer sales expectations came from high unemployment rates, higher insurance-plan deductibles, and the expiration of health benefits under the COBRA program for laid-off workers. "I'm confident that we'll get through this," Hawkins said. "And that people will return [to] going to see the doctors, and doctors will then basically prescribe what's the right therapy."

Medtronic shares fell 10.8 percent on Aug. 24 in reaction to the forecast and second-quarter earnings, but then rebounded 3.4 percent on Aug. 25 and 26.

The economic woes add to other concerns about health-care stocks, especially the eventual impact of federal health-care reform approved in March. "Health-care reform has been a major headwind for the group," says Steven DeSanctis, a small-cap strategist at Bank of America Merrill Lynch.

The health-care law will not be fully implemented until 2014, leaving investors and executives with lots of questions about its final impact. "The devil is still in the details with regard to health-care reform," says Baird's Good.

Bucking the Trend

Some investors and analysts do see reasons to be optimistic about health-care stocks. DeSanctis says many health-care shares are now reasonably priced, and many health-care companies have strong balance sheets with low debt and high levels of cash.

Jim Thorne, portfolio manager of the MTB Small-Cap Growth Fund (ARPEX), says health-care sales could be boosted by the "globalization of health care," especially investments in new medical technology in such emerging economies as China.

Furthermore, health care is still less economically sensitive than other sectors in the stock market. Many health-care companies should be able to continue growing even if the economy remains weak, Thorne says. "Investors will recognize the historical ability of [health-care] companies to outperform in a slow-growth environment," he says.

Even health-care reform could boost health-care spending, although investors will need to be patient. Radinsky notes that the addition of millions of uninsured Americans to health insurance rolls in 2014 should stimulate "pent-up" demand for medical services.

Until then, though, "health care is a lagging indicator," Radinsky says. It's only after millions of Americans get new jobs—with good health insurance coverage—that they will feel comfortable splurging on expensive procedures.

Steverman is a reporter in Bloomberg's Chicago bureau.

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