The health care sector may be poised for some near-term volatility, Goldman Sachs research analyst Matthew Borsch argues, as investors rotate into more economically cyclical groups.
On Wednesday, Borsch removed managed care stocks
from Goldman's current investment list. He kept outperform ratings on the stocks, however.
"Sector rotation will remain a near-term risk to the stocks, but we think moderating price increases will prove a positive for the industry and stocks over the next 12 months and beyond, as it reflects even greater deceleration in the underlying medical cost trend," Borsch said in a research note.
The latest change comes after other analysts reduced their recommendations on the health care group. Earlier this week, SG Cowen lowered its managed care rating to market perform from strong buy. And last Friday, Standard & Poor's downgraded
, Anthem and Wellpoint to accumulate from buy.
The main reason for SG Cowen's downgrade of the sector was concern about decelerating premiums. They are forecast to drop to 15.5% in 2003, on average, from 16.3% in 2002 -- the first sequential slowdown since 1995. According to SG Cowen, that could eat into revenue growth for the sector.
But Goldman Sachs and S&P were less concerned about a decrease in premium growth.
"Longer term, the slowdown in pricing will help keep employers in the game of offering health benefits, whereas continued acceleration would create a health coverage affordability crisis and ultimately lend political support for proponents of government intervention and national health reform," Borsch wrote.
Phillip Seligman, an analyst at Standard & Poors, said the reduction in premium growth is likely to be offset, at better-managed companies, by an improvement in cost control. "The well-run companies will attract more accounts," he said. "That increase in volume should make up for a reduction in the premium growth rates -- especially when firms are able to keep their costs down at the same time."
For Borsch and Seligman, the issue for the group is rotation into higher-beta sectors. "There seems to be a desire to take profits and invest them in stocks with better appreciation potential," said Seligman.
In recent trading, Anthem was up 2% at $57.73, while WellPoint was higher by 4.02% at $66.17.