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Best Positioned for Health-Care Reform

This screen finds companies ready to take advantage when major provisions of law take effect in 2014.

David Krempa, 03/05/2013

This article originally appeared in the February/March 2013 issue of MorningstarAdvisor magazine.  To subscribe, please call 1-800-384-4000.  

In this issue’s stock screen, we search for attractive health-care stocks that could be a beneficial addition to investors’ portfolios.

Sector = Healthcare

With major provisions of the Patient Protection and Affordable Care Act set to take effect starting in 2014, the health-care sector is set to see its biggest change in decades. The new law, which is more commonly referred to as Obamacare, will present opportunities for firms that are positioned to take advantage of the new regulations. As a whole, our analysts believe that the impact on the sector will be largely neutral, as the inflow of newly insured patients will boost volumes, but it will be offset by new taxes and price controls.

However, some individual companies are in a position to benefit from the law, creating opportunities for investors.

And ( Economic Moat = Narrow
Or  Economic Moat = Wide )

Firms with economic moats have sustainable competitive advantages that limit the impact of competition. A moat can take the form of intangibles, such as pharmaceutical firms with patented products, scale advantages, or high switching costs like the robotic surgery machines made by Intuitive Surgical ISRG. Surgeons have been trained extensively on the machines, and hospitals have already sunk cost into purchasing the expensive machines, so it would be extremely burdensome to switch to a competing machine. With the new law, we expect pricing pressure to increase, which will highlight the importance of moats. Firms selling a commoditized product without scale advantages are the most likely to experience a negative impact.

And PCF = 12

David Krempa is an associate analyst with Morningstar.

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