There’s a lot of talk about Amazon (AMZN) being an 800-pound gorilla stalking marketplaces it seeks to enter. Well, imagine what would happen if an 800-pound gorilla met up with a couple of other 800-pound gorillas and announced it was interested in the bananas in your area.
That was the position of health care companies yesterday—most importantly, those in the Health Care Providers & Services subsector—when Amazon, Berkshire Hathaway, and J.P. Morgan announced plans to start a company to provide health care services to their employees.1
The reaction in the market was swift. One example: United Health Group (UNH), a health services provider (think insurance and pharma plans), was down more than 6% in early trading before stabilizing a bit—and this was one day after hitting an all-time high. It was typical of the moves made by many stocks in the industry yesterday morning.
The question, as always, with such moves is whether they indicate some type of sea change—the beginning of something that implies a longstanding trend should reverse—or if they’re emotional overreactions to surprise news. In other words, was there a reason for a company like UNH to be worth 6% less than it was a day earlier because of the announcement of a plan that might create a rival business at some future date?
Beyond the headlines, details about the new venture were scarce. The announcement stated the envisioned company would initially focus on technology to provide "simplified, high-quality and transparent" health care and be "free from profit-making incentives and constraints."2
Health care was the top-performing sector in the S&P 500 last week, and even in the midst of yesterday’s sell-off, it was still the second-highest returner on the year, with the Health Care Providers & Services subsector up more than 8%.
United Health Group’s stock price has increased more than tenfold since 2009, and its latest quarterly numbers (on January 16) blew away both earnings and revenue estimates—keeping up a tradition of positive earnings surprises dating back to 2010.
The stock has already pulled back to roughly the upper level of the December/early January trading range that it broke out of after the January 16 earnings announcement; the lower boundary of the range is the next support level to watch. Past down days of this size in UNH have often (but not always) been followed by a few more days of down movement, then an upturn.
No one should doubt the clout Amazon, Berkshire, and Morgan bring to the health care table. But that doesn’t mean the US health care industry got reinvented yesterday, or that every other health care company is destined to enter a long-term downtrend.
1 The Washington Post. Amazon, Berkshire Hathaway and JP Morgan Chase join forces to tackle employees’ health-care costs. 1/30/18.
2 ABCnews.com. Amazon, JPMorgan, Berkshire creating new health care company. 1/30/18.