Getting Healthier - Zacks Industry Rank Analysis

Industry Rank Analysis 10-13-11

When the Health Care reform bill was being debated, there were many who feared that passage of it would be devastating to the earnings of the health care sector. That has not turned out to be the case, at least not yet. Most of the major provisions of the ACA (aka "Obamacare") do not go into effect until 2014. In the meantime, spending on health care continues to rise faster than for the economy as a whole.

In other words, the share of our economy devoted to health care continues to rise. We already devote far more of our resources to health care than any other country in the world; on a per-capita basis we spend about twice what other advanced economies spend. (Actually, a pretty good case could be made that as consumers we are getting ripped off.) Based on most international benchmarks to judge health care effectiveness (for example, infant mortality and life expectancy) we are decidedly middle of the pack, at best, when compared to the other OECD countries.

However, what is bad for us as consumers (and taxpayers) is not always bad for us as investors. The federal government pays about half of all health care expenses, mostly through Medicare, Medicaid and the VA.

If our health care costs were in line with those of the rest of the OECD, the budget would be almost balanced. Several of the industries related to health care are now showing up very favorably, based on the Zacks Rank.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well; a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization, but the number of companies in the “industry.”

5 in the Top 50 - And Improving

There are five different health care-related industries in the top 50. Not only that, but all five have shown noteworthy improvements in their standings over the last week. All are at least averaged sized in terms of the number of firms they have, but none are giants (by number of firms).

There are 71 firms in these industries, of which 13 (18.3%) of them hold the enviable Zacks #1 Rank (Strong Buy), and an additional 16 (22.5%) have Zacks #2 Ranks (Buy). If the Zacks ranks were random, then one would expect that 5% of the names in an industry would be #1's and 15% would be #2's.

Medical Information Systems

The best of these industries, based on the average Zacks Rank, is Medical Information Systems. This was one of the predicted winners from Obamacare, as one of its goals is to move medical records away from paper and towards electronic form (have you ever stopped to consider just how silly it is for doctors to be writing out prescriptions by hand, given their reputation for bad handwriting?). That industry, with eight members, is currently in tenth place overall -- an improvement of eight spots, with an average rank of 2.33, down from 2.53 last week.

Health Insurance

Not far behind though is one of the industries that many thought would be the hardest hit by health care reform, the health insurers. It is in 18th place, an improvement of 36 spots for the week as the average rank fell to 2.44 from 2.78. For an industry with 18 firms in it, that is a big move in a week.

Generic Drugs

The Generic Drug industry is in 24th place, an eight spot improvement. Lots of the most successful drugs in history have just come off-patent, or are about to in the next year or so, thus opening up very large markets for these firms.

The Rest of the Pack

The Large Cap Pharma group, which is losing the patents to the generics, is decidedly middle of the pack. The smaller drug development industry (93 firms) and the biotech industry (172) are both extremely large by number of firms and this it is exceedingly rare that they would make it to either the top of the bottom of the list. Both of them are better than average, but I have not included those number one or number tow firms in the tables below.

The final two Health Care industries in the top fifty are Nursing Homes and Outpatient Care, coming in 29th place and 46th place, respectively. Nursing homes have an average score of 2.60, leaping 48 spots as its average rank declined from 2.87 to 2.60. Outpatient care has an average rank of 2.68, a 35-spot improvement.

There are a wide variety of market capitalizations to chose from, but most are mid to small caps. The larger-cap names, though, are mostly in the health insurance/HMO’s while the nursing home and outpatient firms are far smaller.

The HMO’s also have some of the lowest P/E’s of the firms shown. They are also very different animals than the other industries, which are all involved with the actual provision of health insurance, not quasi-financials just involved in the payment process for health care. The valuations of the others, based on both this year’s and next years earnings, range from the compelling to the stratospheric.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	"%Ch Curr Fiscal Yr Est - 4 wks "	"%Ch Next Fiscal Yr Est - 4 wks "	"Current Price "
Wellpoint Inc	WLP	$22,746	8.85	8.05	-0.51%	0.10%	$61.95
Aetna Inc-New	AET	$14,201	7.98	7.79	7.99%	4.56%	$37.42
Cerner Corp	CERN	$10,118	34.63	28.33	1.47%	2.60%	$59.94
Watson Pharma	WPI	$8,057	14.37	11.33	2.72%	1.00%	$63.70
Healthspring In	HS	$2,300	8.46	8.07	8.54%	4.86%	$33.95
Health Net Inc	HNT	$2,106	7.64	7.13	2.21%	0.00%	$23.27
Brookdale Senr	BKD	$2,096	N/A	92.09	3.69%	-18.84%	$17.19
Athenahealth In	ATHN	$1,872	94.06	63.54	14.17%	12.32%	$53.69
Computer Prgrms	CPSI	$709	26.26	22.89	9.48%	6.69%	$64.12
Kindred Hlthcr	KND	$672	7.2	7.44	-10.58%	-27.57%	$12.93
Natl Healthcare	NHC	$485	10.22	9.48	0.00%	0.00%	$35.09
Hi Tech Pharma	HITK	$338	10.9	9.93	12.29%	6.57%	$26.56
China Cord Bld	CO	$266	18.58	13.07	-3.39%	5.88%	$3.53

Number 2 Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	"%Ch Curr Fiscal Yr Est - 4 wks "	"%Ch Next Fiscal Yr Est - 4 wks "	"Current Price "
Unitedhealth Gp	UNH	$49,361	10.49	9.53	3.87%	2.91%	$45.56
Humana Inc New	HUM	$11,943	9.29	9.22	7.97%	3.02%	$70.92
Davita Inc	DVA	$7,476	16.52	13.15	0.02%	-0.76%	$78.28
Quality Sys	QSII	$2,373	28.71	23.48	1.50%	1.23%	$81.32
Lincare Hldgs	LNCR	$2,164	11.93	10.33	-9.12%	-8.46%	$22.85
Hms Hldgs Cp	HMSY	$1,888	36.31	29.74	4.43%	1.50%	$66.81
Healthsouth Cp	HLS	$1,863	15.62	13.95	-14.61%	1.66%	$19.57
Wellcare Health	WCG	$1,645	9.09	10.19	14.09%	1.24%	$38.65
Magellan Hlth	MGLN	$1,500	12.51	11.13	3.59%	2.25%	$46.75
Akorn Inc	AKRX	$703	43.76	33.82	0.00%	0.00%	$7.44
Amsurg Corp	AMSG	$699	13.44	11.81	-0.08%	1.34%	$22.33
Medidata Solutn	MDSO	$417	15.22	13.76	0.00%	0.00%	$17.20
Assisted Lvg Cn	ALC	$339	16.33	14.49	0.00%	0.00%	$14.78
Transcend Svcs	TRCR	$271	17.96	15.45	0.00%	0.81%	$25.50
Allied Hlthcr	AHCI	$165	21	18.9	0.00%	0.00%	$3.78
Medtox Scientif	MTOX	$137	25.29	17.91	-6.67%	5.33%	$15.34

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

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