“Obamacare will prove to be a gold mine for astute traders and investors on the long side and the short side.”
By Nigam Arora
MarketWatch, November 8, 2012
Obama has been re-elected; “Obamacare” is the law of the land. It doesn’t matter if you agree or disagree with Obamacare, you might as well generate big profits from it.
Obamacare has been profitable for us. We bought Amerigroup Corp. at $22.05, and, as of this writing, the stock is at $91.44 — this is a whopping 315% return.
It wasn’t long ago when we aggressively bought Tenet Healthcare at $20.40. Yesterday THC hit a 52-week high of $27.60.
Here are 26 ways to profit from both the long and the short side.
The best way to profit on the long side from Obamacare is to buy hospital stocks as utilization rates will increase and uncollected receivables will go down.
Under Obamacare, the pool of paying patients will increase. It is estimated that currently about 30 million Americans are uninsured. The increase in the number of paying patients will be huge.
By law, hospitals have to serve all patients who show up at their emergency rooms including indigents as well as those with no insurance. Hospitals also have difficulty collecting from low income Americans who may have no insurance or are underinsured. Some hospitals aren’t able to collect as much as 30% of their billings.
The earnings of some hospitals may increase by as much as 25%.
Our favorite stock in this sector is THC. Other hospital stocks on our list buy are Community Health Systems, HCA Holdings, LifePoint Hospitals, and Universal Health Services.
These HMOs focus on Medicaid and other government programs and will be big beneficiaries of Obamacare.
We own AGP but it is not suitable for those not in the stock. AGP is being bought by WellPoint.
Other names on our buy list are Centene Corp., Molina Healthcare, and WellCare Health Plans.
Medicare Part D
Medicare Part D is a private plan which provides prescription drug coverage for those eligible for Medicare. Government payments received by insurance companies for this program are likely to see reductions.
Humana is our top pick to short sell, but we will wait for this stock to meet all of our six screens before acting.
In the long run, branded pharmaceuticals will be hurt. Obama will be under intense pressure to reduce rising health care costs in Medicaid and Medicare. Branded drugs are a sitting duck simply because Big Pharma sells them for far less abroad than in the United States.
Large-cap pharmaceutical stocks are in favor these days. The market participants perceive them as safe. The reasoning goes that people will always be using drugs irrespective of what happens in Europe, China or to the U.S. economy.
It doesn’t hurt that these stocks also pay high dividends. Buying high dividend stocks is the rage. However Bush tax cuts expire at the end of this year; if there is no compromise in Washington, income-tax rate on dividends will jump and high dividend stocks will give up some of their recent gains.
Secret to making money by short selling is to sell short stocks that are popular and whose fundamentals are likely to deteriorate. We are short Market Vectors Pharmaceutical.
We have recently taken profits on Lilly, but we plan to short it again.
Two other stocks to short on our list are Merck and Pfizer.
In the short run, Obamacare is positive for generic pharmaceutical companies such as Teva, Mylan, and Dr. Reddy’s Labs. In the long run, these companies will suffer as there will be intense pressure on the prices they can charge. There is an opportunity here on the long side in the medium term, but it will become a short opportunity in due course.
Obamacare levies a tax on medical devices. Further pressure on medical device companies such as Medtronic, Stryker, St. Jude Medical, and Zimmer Holdings to reduce prices will increase.
We plan to short sell these companies when they meet our six screens.
There will be more medical tests as more patients are insured. In the short run, implementation of Obamacare is positive for testing companies such as Quest Diagnostics and Laboratory Corp. of America.
In the long run, Obamacare is very negative for these companies because they will come under heavy pressure to reduce rates. These are some of the best ways to profit from the short side in the long-term.
As more pharmaceuticals are used, the ruling is positive for drug distributors such as McKesson, Cardinal Health, and AmerisourceBergen.
Obamacare will prove to be a gold mine for astute traders and investors on the long side and the short side. The key to making money will be the timing of entries and exits using a proven method such as ZYX Change Method. If you cannot short, consider the inverse ETF RXD.