I had a visit on "Power Lunch" today and we talked about the effect on the health care stocks depending on who wins the White House. In general, pharmaceutical companies do well when they have a new product pipeline of innovative products that allow them to command high prices. That is not the case now with the traditional health care equities so the direction of the political scene is even more important. Innovative products are coming from the biotech industry and that would be a fertile ground to investigate.
Expect significant pricing pressure on the health care industry if the Democrats control the office. More mandated enrollment in Medicare type programs will give the government additional levers to extract lower prices. That might be good and necessary, but it will hurt profit margins and returns on equity on the companies. Humana might have a tough time with a large exposure in this area, and a United Healthcare might fare somewhat better with a more diversified business.
The issue of drug reimportation will probably arise and that won't be good for the basic pharma companies. Along with tougher negotiations on drug costs, the pharma companies might be unattractive for a while. At some price, all potential negatives will be discounted, but when now Senator Clinton launched a health care initiative during her husband's first term, this group traded to a significant discount to the market as the fear of pricing pressure drove investors away.
A traditional response to a Republican in the White House would be much the opposite of the above. There would be less pricing pressure and many of the stocks would prove to be at attractive levels now.
I'm not willing to go too far out on a limb with this industry with the election still months away. At Scotsman Capital, we have concentrated our holdings to a few names. JNJ is a world class company with a diverse business. It's trading at 14x the consensus estimate for this year and that is at the very low end of its historical valuation range, and slightly below a market multiple. Becton Dickinson in the instrumentation area is our other choice. It's at 17x this years estimate, which is not cheap, but we think represents very sound value relative to its growth prospects. I own both names personally. _______________________________________
Vincent Farrell, Jr. is a Principal of Scotsman Capital Management and a regular contributor CNBC.