The Supreme Court's backing of the health-care overhaul has been a green light for many investors to pour cash into medical stocks. But not everyone is buying the healthy prognosis.
Overall, health investors' response to the court's June 28 ruling has been warm, on the thinking that more people gaining insurance coverage will mean increased spending on doctors' visits, exams and medication. In the aggregate, U.S. fund managers, who had been net sellers for most of the year, put about $944 million into those stocks in July, according to research firm EPFR Global.
Specialized health-care and biotechnology funds, meanwhile, saw net inflows of $710 million in July, almost as much as they attracted in all of 2011, according to fund tracker Lipper. Health stocks are up 11% for the year to date, on pace with the Standard & Poor's 500-stock index. But some pros see July's bullishness as no more than a blip. "There was a little sigh of relief, but there's still great concern out there," says Tom Roseen, a senior analyst at Lipper.
Among the concerned is Matt Goff, a financial adviser in Houston, who has cut his health-care allocation to about 10% of his clients' portfolios, from about 15% at the start of the year. Mr. Goff notes that the court's ruling made the health-care law's Medicaid expansion optional for states; since then, at least nine states have said they are unlikely to extend coverage to more patients. That means many hospitals, drug makers and health providers may not get the influx of new business bullish investors expected, Mr. Goff says.
And with Republicans threatening to repeal Obamacare if they make big gains in this fall's elections, he adds, "the political risks are going to grow."
Even if the health-care law stays as is, some medical companies could end up hurt by the changes, says Robert Luna, chief investment officer of SureVest Capital Management in Phoenix. For now, Mr. Luna doesn't plan to increase his 1.5% stake in the health-care sector.
Without the ability to deny coverage to people with pre-existing conditions, health insurers will likely face higher costs, Mr. Luna says. That may force them to increase premiums and reduce reimbursement rates, which could hurt the bottom line for providers and drug makers. "There are just a lot of headwinds out there," Mr. Luna says.
To be sure, many investors are less worried about the impact. Health-care spending is expected to increase steadily as baby boomers age, so "more money is going to be flowing into [the sector] regardless," says Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, who increased his recommended health-care allocation to 16% from 12% at the beginning of 2012.