Friday, November 8, 2013

Trying to Find the Winners from Obamacare

I have been convinced that the Affordable Care Act (a.k.a. Obamacare) will be a huge winner for some segments of the health care industry.

Yes, I know that the introduction of Obamacare has been a disaster, yet I believe that the problems will eventually be fixed.  In the next couple of years millions of Americans will move off the uninsured rolls, and the Romneycare that we are familiar with here in Massachusetts will be implemented throughout the land.

However, the more I talk to analysts in the health care field, the less enthusiastic I become about any opportunities for stock investment ideas.

Yesterday was no exception.

I headed over to UBS to hear from A.J. Rice, who follows healthcare providers and services stocks, as well as the managed care group.  A.J. has followed the space since 1991, and is one of the most highly regarded health care analysts on Wall Street.

The story that A.J. told was one of massive uncertainty among his companies.  No one, it seems, can figure out the details of Obamacare, and are approaching the whole implementation very cautiously.

Hospitals, for example, would seem to be one of the more obvious winners from Obamacare, since the new government program would seem to eliminate one of their most persistent expenses of covering the uninsured. 

However, A.J. notes that some of the benefits will be offset with cuts in other sectors such as Medicare reimbursement rates.  Moreover, most of the publicly traded hospital stocks have already moved sharply higher in anticipation of better earnings in 2014, so there does not seem to be any undiscovered opportunities.

On the other side, there are a number of losers in this story.  Publicly-traded diagnostic lab companies like Quest Diagnostics have already seen an erosion in their business as hospitals and doctors have been turning to internal testing solutions as a way to gain more revenues.

A.J. thinks that the HMO stocks that have less government exposure still look attractive in here.  In particular, UnitedHealth (ticker: UNH) should do well not only because of its basic business but also because a larger part of their business is (ironically) becoming a consulting business to help other healthcare companies cope with the new government programs.

UNH has just been hired to help fix the Obamacare problems - perhaps it ironically will be the best way to play this whole situation. But UNH is not cheap based on historic measures, so buying the stock here carries some risk.