Analysts and Healthcare Stocks

Most pharmaceutical and large cap biotech stocks were hit hard once the impact of healthcare reform was announced. The pharmaceutical industry agreed to sell drugs to the government at lower prices and in return will receive a lot of new customers. On net this will benefit the drug companies. However, they are giving the discounts now and healthcare for everyone will not start for a few years.

This was laid out in the reform bill and yet analysts were shocked when companies announced the impact. Not only that but many analysts capitalized the charges. For instance, if a company were taking a 20 cent hit from healthcare reform and the analysts target P/E was ten they lowered their price target by $2. But in a couple of years these healthcare reform charges will turn into gains. These are one time charges and the effect of them should not be capitalized.

Analysts are supposed to use common sense in what gets capitalized and what is on time in nature. Most financial companies took huge write downs last year and are now writing up those assets. Analysts are happy to capitalize those earnings even though they are low quality and likely one time in nature. And they are happy to capitalize losses that are one time in nature for the drug companies. Reminding me once again that you can't teach a spreadsheet jockey common sense.

1 comment:

Anonymous said...

I don't think the analysts are totally at fault--it is investors who are being completely irrational about health care stocks. The same investors who hate health care and see danger everywhere are perfectly sanguine about buying BAC and C and Micron.