Times like these I wish I could take a look behind the scenes of the Supreme Court hearings and see the dramatic mix of politics, and determination on the side of large companies who have a stake in the results. The Affordable Care Act, or "Obamacare," ruling is expected Thursday.
While I am aware of the drama behind the scenes, as an investor and asset manager, I need to rise above it. My only job is to try to play the outcome for the greatest gain.
In general, trying to predict what the official ruling on the Affordable Care Act will be is simply too difficult to achieve with any degree of success. So my primary strategy is to pick stocks that can gain whether or not the Affordable Care Act is repealed or held constitutional. See below for what I am buying in preparation for the decision.
Cigna (CI): As a very substantial health insurance company, CI has a big stake in the fate of the Affordable Care Act. The company took in $21 billion in premiums in 2011, and almost $15 billion of that came from medical insurance. After they raised premiums during the past two years, margins are at their best levels since when the new millennium started. These rates are sticky. That is, they are unlikely to come back down, regardless of the regulatory environment. As a result, I believe CI will benefit no matter what happens to Obamacare. With a repeal, CI still has great margins, and if not repealed CI should continue to do well with its current pricing structure.
CVS Caremark (CVS): People are living longer, thanks to all manner of pharmaceuticals. CVS makes money every time somebody picks up their prescription. In the end, CVS should win no matter what the Supreme Court does. Obamacare or no, drugs will never go out of favor.
The Thomson mean one-year price target on the company is $51, with a lowest price target of $46. And these numbers have stuck since the initiation of the Obamacare vote. The company opened this week around $45, which I infer to mean that analyst sentiment is that whether Obamacare is repealed or upheld, CVS will be fine.
Express Scripts (ESRX): Express Scripts bought Medco, and these two businesses could combine for real scale. According to a Bloomberg article on the deal, "the benefits manager will handle almost 1 of every 3 prescriptions written in the U.S." I believe the company could show a double-digit EPS growth in the next five years. Even if Obamacare is repealed, my speculation is that ESRX could deliver an upside surprise.
Oliver Pursche is co-portfolio manager of GMG Defensive Beta Fund. For more investment ideas and market analysis, tune into our daily radio program at 10:05 a.m. (EST) weekdays at FinancialTalkShow.com.