It’s time to take profits on some health-care stocks, Cramer said Friday, specifically Unitedhealth Group, Humana and RehabCare Group.
“The easy money has been made,” Cramer said, so it’s time to sell.
These stocks had suffered due to the market’s fears of what President Obama had planned for the industry. But Cramer recommended a select group of HMOs once he realized – given that only a watered-down bill would pass through the Senate – Unitedhealth, Humana and RehabCare were mispriced. And he was right, as the stocks shot higher when Wall Street caught on. Since their 2009 lows, Unitedhealth, Humana and RehabCare are up 103%, 172% and 141%, respectively.
But that’s not the only reason he’s changing course. These three companies have a lot of Medicare exposure, which will most likely be cut to make up for huge government deficits. That’s especially true now that health-care reform looks like it is dead in the water, thereby eliminating the proposed tax money that the government would have used to keep Medicare going at its current level.
This is a key development when you consider that Humana gets about 74% of its premiums and fees from the government, with Medicare programs accounting for 60% of that, UNH gets roughly 30% of its revenue from government programs, and RehabCare is 70% Medicare.
The whole health-care group isn’t being abandoned, though. Cramer said he still likes drug companies with big dividends, like Bristol-Myers Squibb and its 5% yield. He’s also sticking with WellPoint because he thinks it’s the HMO least affected by Washington. WLP is up 37% to $65 since Cramer’s Oct. 29 recommendation, but he said the stock won’t be expensive until it reaches $90. And lastly, he also recommended Covidien , a medical-device play that just reported a stellar quarter on Wednesday and is up 20% since his Oct. 7 call.
Cramer was willing to endorse these names because they didn’t rally only on a softer-than-expected health-care bill. They had other positives as well, and that’s why they can still be owned.
The bottom line: The decline of Obama Care has lifted health-care stocks to levels that Cramer no longer feels comfortable recommending. So ring the register on UNH, HUM and RHB. But for investors who want to play the sector, Cramer said they should consider BMY, WLP and COV.
Cramer's charitable trust owns Bristol-Myers Squibb.
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