The big news this week was the failure of Republicans to move forward on repeal and replace of the Affordable Care Act (ACA), also known as Obamacare.
Even though President Trump came out on Wednesday to try to rally the troops, it seems far more likely that not only will repeal and replace not happen, but rumored back-up-plan #1, straight out repeal, is a non-starter as well. As it should be, in my opinion. Regardless of where your loyalties lie, I think most people (and healthcare company CEOs) would agree that it’s better to stick with what you have then throw it out the window and expose the country to a completely unknown health care environment, especially when Washington isn’t exactly instilling confidence in its ability to get things done.
Thankfully, I’m not a political analyst, so I can limit my views and research to how this all is affecting stocks. And most specifically, the healthcare sector stocks we cover in Cabot Small-Cap Confidential, which are medical device stocks.
But before we get to that, I need to point out something that I suspect may come as a surprise. Amid all the debate around healthcare, and all the statements about how Obamacare is the worst, about how our healthcare system is failing us, and despite the on-again-off-again repeal-and-replace effort, small-cap healthcare is still the number-one performing sector this year.
Not only does its 21% rally make it the best performing small-cap sector, but it also puts it 2% ahead of the best performing large-cap sector, technology, which is up 19%.
The advance has been consistent since the beginning of the year, and the chart of the PowerShares Small Cap Health Care ETF (PSCH) looks awesome.
This performance seems to fly in the face of everything we’ve heard about the current and future state of health care in the U.S.
What gives?
The simplest (and therefore, most likely) answer is that even since provisions of Obamacare went into effect, these stocks have been doing well because they’ve been operating in a relatively friendly environment. And perhaps, even amid the controversy and political posturing surrounding Republican efforts to replace the ACA, healthcare companies are adapting in ways that will allow them to grow, despite policy uncertainty.
Admittedly, that explanation lacks specificity. But given that the small-cap healthcare sector spans medical devices, biotech, pharmaceuticals, healthcare providers and healthcare services, and that each of these sub-sectors has different pricing, regulatory and competitive dynamics, any non-company-specific explanation for the strength must be broad.
A more granular level explanation must delve into the 14 major repeal elements of the proposed Republican replacement bill, also known as Trumpcare. The big elements include repealing the medical device tax (a 2.3% tax that was already suspended for two years starting in 2016), investment tax (3.8% tax for those with household incomes over $250,000 for married filers and over $200,000 for single filers), tanning tax (10% on sales of indoor tanning), Additional Medicare Tax (0.9%, same thresholds as investment tax), the health insurance fee (HIF fee paid by insurers, already suspended for 2017), and the tax on brand pharmaceutical manufactures. Trumpcare proposed repealing all of the above, and more, beginning in 2018. Also on the table was an end to Medicaid’s expansion funding, beginning in 2021, with a three-year phase out. And then of course, there’s corporate tax reform, which could hit healthcare-related companies in different ways.
At this point, I must quote Trump. Man, nobody knew health care could be so complicated!
Obviously, we can’t get into details on all these elements today. And the optimist in me is saying we don’t need to bother. The market is telling investors not to be overly concerned with the healthcare debate.
Maybe it’s wrong. But then, maybe it’s not.
I don’t think all healthcare stocks are going to the moon tonight. They’re a little expensive on a forward P/E basis, but not so much on a forward price-to-sales basis. I think selective investments can still be made. We have two medical device stocks, BioTelemetry (BEAT) and AxoGen (AXGN). Both are rated Buy, and both are trading at or near 52-week highs.
Updates
Airgain (AIRG) There’s still not a lot to say about Airgain, and certainly not much that’s positive after the stock dropped 3% this past week. As I’ve been saying, I think it’s cheap and the growth is good. But buyers just aren’t stepping up. The next earnings report should be a turning point. And if not, we’ll evaluate whether or not to stick with it. For now, keeping at Buy. BUY.
AppFolio (APPF) The stock looks great after an 8% rally this week and another 52-week high. The trend suggests a pullback in the not-to-distant future, so while I’m keeping at Buy, I recommend that you limit to smaller purchases. We don’t have an earnings date yet, but obviously that will be a major determining factor as to where shares go next. BUY.
Asure Software (ASUR) The stock faltered 10% this week on news of the CFO’s departure to re-join a private equity group that he’s worked with in the past. This isn’t great news as there is no replacement yet, and that suggests his departure came as somewhat of a surprise. Usually these things are announced well in advance to assure a smooth transition. Not so. The rest of the management team will have to pick up the slack until a suitable replacement is found. That’s potentially complicated given all the acquisitions and integration work going on. Shares haven’t rebounded from the news, and I don’t suspect they will until there are some positive fundamental developments. Keep holding. HOLD.
AxoGen (AXGN) As I mentioned in my opening commentary, healthcare stocks are on fire and AxoGen is right in the mix. Shares were up 5% this week and hit a fresh 52-week high. Given that we’re trying to average in at lower prices, this isn’t exactly great news. But it should mean you’ve made money on what you’ve purchased so far. We have an earnings date now. BUY.
Announced earnings date: August 2
BioTelemetry (BEAT) BioTelemetry also had a monster week as shares reacted to the Trumpcare fail by soaring to a 52-week high, and then kept rising. The company gets around a third of revenue from Medicare, which then helps establish the rate it gets from other payers. In 2017, the company’s Medicare rate will likely decrease by around 3%. But that hasn’t hurt the stock, possibly because rates went up by 8% in 2016. These rates fluctuate depending on the life cycle of products—newer products typically have higher reimbursement rates. It is subject to the 2.3% medical device tax that came along with the ACA. But, as I already noted, that tax has been suspended until the beginning of 2018. Whether or not the tax will be repealed is up in the air, but I suspect there will be a lot of Republican-led pressure to do away with it permanently regardless of what happens with the rest of the ACA. The LifeWatch acquisition changes a lot about this company given it makes it about 50% larger. But we don’t know all the details just yet. We need the earnings update. BUY.
Everbridge (EVBG) We’re still chopping around in the low 20s. But, at least we have an earnings date. Keep holding. HOLD HALF.
Announced earnings date: August 3
LogMeIn (LOGM) Momentum slowed a little yesterday, but we’re in far better shape than we were two weeks ago. And with earnings on tap for next Thursday, we’ll have a bunch of new information to factor in very soon. Keep holding. HOLD HALF.
Announced earnings date: July 27
MindBody (MB) No change. The stock still looks weak. Thankfully, earnings are due out next Thursday. Among other things, we want to hear some discussion on what the secondary offering cash will be used for. Will we get a major announcement? HOLD HALF.
Announced earnings date: July 27
Primo Water (PRMW) No fundamental developments, but we got a little bounce back in Primo’s step this week as the stock regained 13 and its 200-day line. BUY.
Q2 Holdings (QTWO) The company announced the launch of its interface for Visa DPS Disputes this week. The interface helps to streamline disputes through the entire resolution process by electronically passing forms to Visa. Other news flow is quiet as we march toward an earnings release in two weeks. Shares have traded flat this week, and are holding just above their 50-day line. HOLD HALF.
Announced earnings date: August 2
U.S. Concrete (USCR) Absolutely no news of significance. Shares are moving sideways and we don’t have an earnings date. But, we are in the second half of a year in which management has said it expects to break into a major, new market. Keep holding. HOLD.
