Over the past few months, there were numerous times we discussed the Affordable Care Act (“ACA”) and the uncertainty its vast and changing provisions bring to various market segments. While the stock market typically abhors uncertainty, the entire health care sector seems to be shrugging it off and marching higher this year.
The Wall Street Journal took on the task of digging deeper into this subject and yesterday reported that ACA impacts are already showing up on the bottom line for many companies. The newspaper conducted its research by searching the transcripts of the most recent earnings calls. It found more than 80 public companies that directly cited the ACA as the cause for either boosts or shortfalls in quarterly earnings.
So far, some of the biggest winners have come from industries outside the health care sector. Media and advertising companies are early beneficiaries. For example, Emmis Communications (EMMS) “is forecasting a 12% to 15% increase in health-care advertising this year, and up to 20% of that is expected to come from ACA-related advertising from insurers, hospitals, and state-government agencies.” Others seeing positive results from ACA activity include staffing, outsourcing, and IT companies.
Insurance providers are among those taking a hit to earnings this year as they invest for the future by spending on advertising, staffing, and IT infrastructure – the same industries identified above as seeing positive impacts. Additionally, large employers from many industries are paying higher costs for insurance benefits provided to full-time employees. They are also encountering additional training expenses in the short-term for part-time employees not eligible for company health plans. For example, convenience store operator Pantry (PTRY) will be spending $8 million a year more on ACA related health care costs for its 6,600 full-time employees. Additionally, the company spent $700,000 on training for 800 new part-time employees that will not be receiving company health care benefits.
We believe the 80+ companies turned up by the Wall Street Journal’s research is just the beginning. Before it’s over, nearly every company will be affected – some positively and some negatively. The largest unknown at this time appears to be the magnitude of the impact.
Health Care keeps its title as the top performing sector while widening its lead over the other categories. Utilities moved up a spot to take second place, and its position now puts two of the three defensive sectors at the top of the rankings. The third member, Consumer Staples, is the odd-man out and sits near the bottom. Technology is performing well, although it did relinquish its second place spot to Utilities, and Real Estate is quickly closing in. Materials and Industrials are holding their ground in the middle. Consumer Discretionary improved is ranking as both homebuilders and retailers advanced on the week. Despite much higher prices for natural gas, Energy continues to lag. Financials dropped two spots, and the sector is starting to encounter increased volatility. Consumer Staples and Telecom swapped spots at the bottom this week with Telecom now occupying last place.
The various style categories did not move in unison this past week. Instead, it was a classic case of the strong getting stronger and the weak becoming weaker. Mid Cap Growth extended its time at the top of the rankings to three weeks. Micro Cap, the former leader, is close behind. Small Cap Growth asserted its strength and moved into the upper tier. Mid Cap Blend and Mid Cap Value round out the top five, giving the Mid Cap trio a decisive edge over the other capitalization stratifications. Large Cap Growth comes in sixth in today’s lineup, which positions Growth as having superior relative strength to Value. The lower tier continues to be a mix of Small and Large Cap categories. Mega Cap now sits on the bottom, and its strength noticeably lags the rest of the pack.
If you are trying to determine the changes in the relative rankings of the global categories, then you can stop. All eleven are in the same exact order as a week ago, and their momentum readings are very similar. Euroland and the U.K. are closely paired at the top and widened their lead over the other regions. The U.S. and EAFE are now virtually tied for third place, and World Equity comes in at fifth. Canada and Pacific ex-Japan, two resource-rich categories, hold the middle ground. The bottom four categories remain mired in downtrends. Japan’s inability to separate its economic fortunes from that of its Asian neighbors continues to weigh on the nation’s stock market. News this morning indicates that China’s central bank engineered a decline in the country’s currency recently, supposedly in preparation for a wider trading range against the dollar. This caught many currency players off-guard, as rising Chinese currency values have been considered a sure bet for a number of years.
“The law keeps changing. That’s another unknown. Who knows how many times it’s going to change?.”
Dennis Moore, CFO of J&J Snack Foods on ACA impacts
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