HCA Healthcare Rallies: Weight-loss drugs really a big threat?

Key Points

• Hospital chain HCA Healthcare is showing a bullish base, posting gains during a week when the broader market declined.
• HCA, along with medical device makers Insulet, ResMed and DexCom saw share prices decline after positive cardiovascular trial results for obesity drug Wegovy.
• Investors may be realizing that some of the selling was overdone, with analysts maintaining a "moderate buy" rating on HCA.

Hospital chain HCA Healthcare, Inc. NYSE: HCA has been working on a bullish base and even managed to post gains in a week when the SPDR S&P 500 ETF Trust NYSEARCA: SPY pulled back. 

Investors are finally realizing something that may seem like common sense: The advent of diabetes and weight-loss drugs from Eli Lilly & Co. NYSE: LLY and Novo Nordisk A/S NYSE: NVO won’t suddenly make the entire population perfectly healthy, and put an end to hospital visits.

Medical device makers such as Insulet Corp. NASDAQ: PODD, ResMed Inc NYSE: RMD and DexCom Inc. NASDAQ: DXCM, all in the diabetes-related space, were slammed after Novo Nordisk said in August that clinical trials found its obesity drug Wegovy reduced cardiovascular risk factors by 20%

There’s a certain amount of logic to the selling: As patients lose weight through treatments such as Novo Nordisk’s Wegovy and Ozempic, or Eli Lilly’s Mounjaro and Zepbound, it’s likely their overall health will improve, reducing incidents of cardiovascular problems and diabetes.

Investors fretted over effects of weight-loss drugs

HCA was in a similar position. The stock began declining in July, but the downtrend accelerated in September, as investors continued to fret over the effect of the weight-loss drugs.

Take a look at the HCA Healthcare chart: The stock underperformed the S&P 500 throughout much of 2023, but topped fellow healthcare stocks in the Health Care Select Sector SPDR Fund NYSEARCA: XLV. 

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HCA returned just 4.4% in 2023, underperforming the broad index by a wide margin.

However, the entire healthcare sector underperformed the broader S&P 500 in 2023, with the XLV ETF returning just 2.06%. Insulet, which makes insulin pumps, is one of the sector’s worst performers on a one-year basis. 

But are analysts starting to change their tune on stocks like Insulet and HCA?

In November, Novo Nordisk announced full results of its phase 3 cardiovascular trial, confirming that treatment with Wegovy can reduce the risk of heart attack, stroke, or cardiovascular death by 20% compared to a placebo. 

Analysts upgrading insulin pump maker

Take a look at the Insulet analyst forecasts: Since those results were announced, analysts at J.P. Morgan and boutique investment bank Robert Baird upgraded Insulet. The stock has a consensus view of “moderate buy” and a price target of $259.33, an upside of 31.06%.

That suggests that analysts, collectively, believe some of the selling has been overdone. 

In the case of HCA, the company has been actively addressing threats from weight-loss drugs. On the one hand, the healthcare industry should, in theory anyway, be seeking better patient outcomes. If weight-loss drugs can deliver those outcomes, that would be a good thing, right?

Well, not necessarily for shareholders or even employees. Say cardiovascular problems and obesity problems decline, causing a reduction in hospital visits. That would mean a revenue decline for HCA and other hospital chains. 

HCA revenue growth accelerating

So far, there’s no indication that’s happening. MarketBeat’s HCA Healthcare earnings data show the company increasing revenue at single-digit rates in the past four quarters, with revenue growth accelerating. 

The HCA Healthcare chart shows the stock has been in rally mode since early November, and wasn’t hit by Novo Nordisk’s confirmation of its preliminary August results. However, you could argue that the news was already baked into the stock’s performance, after the initial release. 

The stock is up 12.47% in the past three months, which means it’s outperforming the S&P healthcare sector, which has returned 9.30% during that time. 

In early November, just before Novo Nordisk’s final results were published, HCA Healthcare, the largest publicly traded hospital chain, with a market capitalization of $73.83 billion, said it expected normalization of growth. The company said pandemic-related disruptions were behind it. 

Focus on fast-growing regions

That kind of discussion does tend to give investors confidence, and it shows. In addition, the company’s focus on growing markets, such as Nashville and Austin, should offer plenty of potential to increase revenue. 

HCA Healthcare analyst forecasts show a consensus view of “moderate buy” with a price target of $296.95, an upside of 7.65%. Analysts have been lowering their targets or outlooks recently, but if you look closely, you’ll notice that many who have lowered their price targets still consider the stock a “buy.”