Healthcare ETFs On Life Support

The markets are reeling once again and there has been plenty of pain to go around amongst healthcare ETFs.

So far in 2009 the Vanguard Health Care ETF (VHT), PowerShares Dynamic Healthcare Sector Portfolio (PTH) , the PowerShares Dynamic Healthcare Services Portfolio (PTJ) and the iShares Dow Jones U.S. Healthcare Provider Fund (IHF) have seen respective declines of 17.2%, 19.9%, 20.7%, and 23.1%.

In recent weeks, one of the leading contributors to these sharp drops has been the envisioned potential fallout from the Obama administration’s plan to reform the healthcare system in the U.S.  The administration has laid out plans to fund a large portion of its health-reform agenda with new taxes and $175 billion in cuts to private Medicare plans.

These cuts will impact insurers, hospitals and other interests in the hopes of building a $634 billion reserve fund over the course of the next 10 years in order to expand health care coverage. The proposed cuts are expected to arise from mandating insurers to competitively bid to offer Medicare Advantage plans.

In terms of individual stocks in the healthcare space right now, Humana (HUM) and UnitedHealth Group (UNH) have been among the hardest hit. Humana is down a staggering 49.0% since the beginning of the year, while UnitedHealth has shed more than one third of its market value over the same time frame. Humana has approximately 1.4 million Medicare Advantage members. UnitedHealth is the nation’s leader in this category with 1.7 million Medicare Advantage members.

I closed out a short position on Humana on Monday in part because I believe that this relentless selling has been somewhat overdone in the short-term. Some of these stocks and ETFs have become particularly cheap amidst this onslaught. IHF and PTJ both have P/Es in the 10 to 11 range. Humana and UnitedHealth are even cheaper with forward P/Es in the 3 to 6 range.

Falling valuations and adversity on the political front are not the only obstacles that these companies have faced in recent quarters. Lackluster revenue growth, strained medical cost ratios and maturing enrollment numbers have also crept to the surface. Taken together, these factors present too much uncertainty to make me a buyer in this arena right now. That being said, the sector is due for a short-term correction in the not too distant future and might be worth a second look for bargain hunters.

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