The U.S. government’s monthly budget report released yesterday indicates more spending on the horizon. Which industries have been chosen to receive the extra cash? Knowing that could give investors a heads-up on which stocks could rise as a result of the government’s increased expenditures.
Pre-Election Handouts
It really shouldn’t surprise anyone that the government is increasing its spending over the near term, seeing as we are already less than two years away from the next election. As the Stock Trader’s Almanac points-out regarding the 3rd year of the presidential cycle (which 2015 is):
“Typically each administration usually does everything in its power to juice up the economy so that voters are in a positive mood at election time.”
Yesterday’s monthly budget report issued by the Congressional Budget Office shows this year will be no different. Here are some basic highlights from Q1 of the government’s 2015 fiscal year (October to December 2014):
• Budget deficit for Q1 of fiscal 2015 is $177 billion, some 2.3% higher than the deficit of $173 billion in Q1 of fiscal 2014.
• Expenditures in Q1 of fiscal 2015 were $916 billion, some 9.2% higher than the expenditures of $839 billion in Q1 of fiscal 2014, a quarterly year-over-year increase of some $77 billion.
• Expenditures in December 2014 were $333 billion, some 43.5% higher than the expenditures of $232 billion in December 2013, a monthly year-over-year increase of some $102 billion.
• Surplus in December 2014 (income minus expenditures) was $2 billion, as compared to a surplus of $53 billion in December 2013.
Until recently, the federal government was very disciplined in reducing the deficit, which has fallen from $1.4 trillion when President Obama first took office in 2009 to just $483 billion by the end of fiscal 2014 in September of 2014.
Yet now the government seems to be gearing up for that regularly-scheduled “pre-election spending spree”, shifting its focus away from closing the budget gap for a while and increasing its spending. I guess closing the deficit by almost a trillion in just six years has earned the government a little break from penny-pinching.
But to where is the extra spending to be directed? Investors would do well to anticipate where the extra money is going and try to get there before it does.
Follow the Money
It really should not surprise investors where the extra expenditures are destined, for the sector is one that is near and dear to Obama’s legacy: healthcare.
As the Congressional Budget Office reports, “Outlays rose for the each of the three largest mandatory programs:
• Medicare, by $18 billion [15% increase], primarily because of a large payment made to prescription drug plans in November 2014 to account for unanticipated spending increases in calendar year 2014;
• Medicaid, by $16 billion [23% increase], largely because some of the provisions of the Affordable Care Act did not take effect until January 2014;
• and Social Security benefits, by $9 billion [4% increase].
Changes in outlays for other programs boosted spending by an additional $1 billion, on net.”
These, of course, are not the “total” amounts going to each area, but are the amounts of the “increases” in spending to each area. Healthcare is receiving $34 billion worth of increases, or some 77.27% of the $44 billion of total increases, with Social Security receiving 20.45%, and all other programs receiving 2.27% of the extra money being spent.
Hence, the sector which should benefit the most from the pre-election spending spree over the next 1.75 years is Healthcare. But that’s a huge sector to sift through. Might yesterday’s budget report help us narrow the selections down?
Narrowing Down Our Search
Unfortunately, the budget report doesn’t go into specifics, and thus doesn’t offer any help in figuring out which industries within the Healthcare sector would benefit most. But there is another place we can turn to, such as a basic industry description index such as can be found at Dividend.com.
The Healthcare sector is generally broken down into 14 industries: 6 related to pharmaceuticals, 4 related to care facilities including hospitals and long-term care, 3 related to medical labs and equipment, with the remaining one devoted to Health Care Plans.
Knowing that some $34 billion worth of spending increases are earmarked for Medicare and Medicaid gives us a reasonable indication that it will be used to lower the costs incurred by patients for prescriptions and visits to care facilities. Yet the companies that will likely benefit most from the extra expenditures are companies in the Healthcare Plans industry.
“Healthcare Plan companies offer health benefit plans to employers and individuals,” Dividend.com introduces the category. “These include health plans for those who require long-term care or specialty benefits, along with point-of-service plans, traditional indemnity plans, and other hybrid plans.”
The nation’s six largest companies in the industry have already run miles ahead of both the broader market S&P 500 index and the benchmark SPDR Healthcare Sector ETF (NYSE: XLV) as graphed below. Over the past two years, where the S&P (in black) has risen some 38%, and XLV (in blue) has risen some 68%, all of the top six Healthcare Plans companies have gained from 88% to 109%.
Source: BigCharts.com
The six are listed below in order of greatest gains, followed by their analysts’ recommendations (strong buy / buy / hold / underperform / sell):
• Humana Inc. (NYSE: HUM), rising 109%, recommended 6 / 4 / 12 / 1 / 1,
• Anthem, Inc. (NYSE: ANTM), rising 108%, recommended 5 / 3 / 13 / 0 / 0,
• Aetna Inc. (NYSE: AET), rising 97%, recommended 6 / 9 / 8 / 0 / 0,
• UnitedHealth Group Incorporated (NYSE: UNH), rising 93%, recommended 8 / 11 / 4 / 1 / 0,
• Cigna Corp. (NYSE: CI), rising 91%, recommended 3 / 8 / 9 / 0 / 0, and
• CVS Health Corporation (NYSE: CVS), rising 88%, recommended 9 / 11 / 6 / 0 / 0.
Tallying up the recommendations for all sex we have 37 strong buys, 46 buys, 52 holds, 2 underperforms, and 1 sell. Now that is confidence in an industry.
Joseph Cafariello
