Investors have always considered the health care sector to be a defensive play with plenty of upside and limited downside. The prevailing assumption is consumers will continue to spend money on their health care even during economic or market downturns. Current trends, such as an aging population and greater life expectancy, also point to increased demand for health care services. With the advent of the Affordable Care Act (ACA) and the expansion of Medicaid, hospitals, in particular, are expected to see increased revenues due to higher numbers of admissions. If you are looking to boost your portfolio’s defenses against the next recession or market downturn, the following are five hospital stocks to consider.
HCA Holdings, Inc.
HCA Holdings, Inc. (NYSE: HCA) operates the country’s largest chain of hospitals based on revenue, with a large concentration of facilities located in growth areas, such as Florida, Houston and other parts of the Sun Belt. Its large scale enables it to negotiate favorable prices on equipment and supplies, which keeps costs low. In December 2015, concerns over an increase of uninsured volume, up to 8% versus 7.3% from a year ago, have been more than offset by HCA's strong return on invested capital (ROIC) of nearly 20%. The company has been expanding its orthopedic and cardiac capabilities, attracting more patients and physicians. Industry analysts expect HCA earnings to grow well above the industry average over the next five years.
LifePoint Health, Inc.
LifePoint Health, Inc. (NASDAQ: LPNT), formerly LifePoint Hospitals, operates facilities in rural parts of the United States and has moved into several states with expanded Medicaid programs. As with many hospital management companies, LifePoint has benefited from the ACA, with a substantial increase in volume, including admissions, surgeries and emergency room visits. LifePoint Health also owns more than 1,000 physician practices as well as nursing homes and assisted living facilities.
Community Health Systems, Inc.
Community Health Systems, Inc. (NYSE: CYH) is the largest operator of hospital facilities in the country with more than 200 hospitals in 29 states. Its acquisition of Health Management Associates gives it broad geographic diversification and added scale to negotiate favorable pricing. Community Health benefits from its strong presence in eastern states where Medicaid expansion has been the greatest. With a price-to-earnings (PE) ratio of 18.9, analysts believe the stock is undervalued as compared to its historical five-year average PE ratio of 22.0. Analysts are projecting a five-year earnings growth rate of 16%.
Tenet Healthcare Corporation
Tenet Healthcare Corporation (NYSE: THC) is one of the largest operators of hospitals in the Sun Belt, with a high concentration in the fast-growing urban areas of Florida. As of December 2015, it operates 80 hospitals and 210 outpatient centers. Tenet has a diversified revenue stream from rehabilitation and specialty hospitals, psychiatric facilities and medical office buildings. Tenet Healthcare, which has been experiencing improved patient growth, should benefit in the long term from the increasing medical needs of the large baby boomer populations in the states it serves.
HCP, Inc. (NYSE: HCP) is not a hospital stock. It is technically not even a stock. It is a real estate investment trust (REIT) that invests in a portfolio of health-care related properties. Generally, REITs can be somewhat interest-rate sensitive and subject to the risks of the real estate market. HCP-owned properties are occupied by medical offices, hospitals and senior-housing facilities that are more impervious to cyclical economic trends. The reliable revenue stream generated by HCP properties pays out a 6% dividend, which it has done, uninterrupted, since 1988. Investors should not expect much growth in the share price, but with a 0.39 beta, there should not be much downside either. In the meantime, investors can sit back and enjoy a 6% dividend yield.