Finding ‘Healthy’ Profits in the Healthcare Sector: Investor’s Overview

Today, we’re continuing our series on the strategic dynamics shaping the sector categories used by analysts to understand the equity market. We've seen that while every sector contains firms with diverse business models, sectoral analysis can help us see how the "big picture" fits together.  Today, we’re taking a look at one of the sectors likely to see the most change in coming years: healthcare. This sector features an interesting mix of growth potential, counter-cyclical protection, and immense regulatory risk.

Like most of the sectors we have covered so far, the Healthcare Sector includes a diverse set of industries, in this case ranging from pharmaceutical firms to device makers to insurers to actual hospitals. While each of these industries exhibits unique strategic dynamics, they share this basic similarity: as the economy spends more of its total output on health and well-being (a huge and accelerating trend) firms somewhere in this sector will benefit from that spending. The chief long-term threat to this sector’s profits comes from the potential of government-led reform to the medical payments system supporting this burgeoning cash cow. Major reforms to anything from pharma IP to insurance laws could have seismic effects in this marketplace. And no one really has any ideas how precisely such reforms would play out.

But while chaos appears certain, most experts don’t expect the overall growth in total health spending to slow any time soon—with or without reforms. Factors from longer life expectancy to better chronic disease management to obesity appear to set to drive additional health spending well into the future. The question for investors, of course, is which companies will reap profits from this increased spending.

The healthcare sector has been a bit trickier for traditional smaller investors to trade in (outside of options like sector-wide mutual funds) simply because most categories of firms in this sector require specialist knowledge to fully analyze. True fundamental analysis of an insurance company, for instance, requires knowledge of its risk pool, reserves available for payouts, long-term actuarial trends, and more. Investing in pharmaceutical stocks requires understanding drug development pipelines year into the future. An investor’s ability to evaluate hospital facility stocks will depend on his ability to predict political outcomes for the next several decades.

Each of these complexities introduces uncertainties that confound even some of the knowledgeable subject matter experts in the world. They also create unique opportunities for news-based traders. The lack of forward-looking certainty in this sector means big institutional investors can’t buy dramatically better information than smaller players. When a pharmaceutical stock issues a press release on breakthrough clinical trial results, news breaks to NQ users and big players at the same time. Indeed, pharmaceutical stocks are a source of some of the most dramatically profitable news events for NQ users. Because of its unique ability to limit buy-and-hold risk, news-based trading also offers an excellent avenue for getting in on the growing revenues from this sector without longstanding exposure to substantial political risks. Mergers have been accelerating in this sector as private firms look to create cost-cutting alliances; M&A events represent another great source of profitable news-based trades in healthcare. 

The healthcare sector is just one of the many market segments where NewsQuantified users can find outstanding profits every single day. If you’d like to learn more about synthesizing historical data with real-time news analytics to beat hedge funds at their own game, we recommend one of our complimentary virtual training sessions. There’s no obligation or hard sell, just an up-close look at our platform and the myriad strategic investing possibilities it facilitates. You can sign up for a spot in our next session using the button below.

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