|Forbes.com, Spring, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
Were it we could be a fly on the wall inside the hallowed chambers of the Supreme Court. At stake, it seems, is the very underpinnings of democracy. Layer on a veneer of politics and big money, and the drama is fairly palpable.
But as investors we need to leave this potboiler behind, calculate the odds and figure out how to make money. Depending on who you talk to, the repeal of Obama’s health care plan may or may not happen.
Translation: the odds are incalculable. Accordingly, we’re buying equities that will win in either scenario, such as the ones below. For these stocks, I think the upside can be realized a little quicker if Obamacare is repealed, but in the event it isn’t, they still offer attractive long term growth opportunities.
Cigna (CI) may be one of the biggest beneficiaries of an Obamacare repeal. Keep in mind that Cigna is one of the largest health insurers of the land. Of the firm’s approximately $21 billion in premiums for 2011, 70% came from issuing medical insurance and 7% from mail order pharmacy operations.
After successfully raising premiums in 2010 and 2011 in anticipation of the added costs health care reform would bring, margins are at their best levels in over a decade. Historically, insurance companies have been quick to raise rates and slow to lower them–a strategy that is bad for consumers but good for investors. Thus either way, I think CI will win. If repeal occurs, Cigna is well positioned to weather the changes, and if it isn’t I think CI will enjoy outsized margins for several years.
CVS Caremark (CVS): With life expectancies long and growing, I think selling the pharmaceuticals that make it possible is a good business to be in, with many, many years of growth ahead. To my readers over 50, have you counted the number of pills you are taking lately? Although CVS’s P/E ratio and price to cash-flow ratio are above its peer group, which includes Walgreen and Rite Aid, I believe this is sustainable because its operating margins and net profit margins are also above its peers.
Wall Street analysts have a consensus price target of just under $50 by year-end, from the current level of nearly $45. Should Obamacare be repealed, I believe that CVS could further improve its’ margins.
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Express Scripts (ESRX) anticipates completing its planned acquisition of Medco imminently. The combination of these two businesses’ could be quite powerful and help drive the stock higher. The combined business is expected to grow by 8% annually over the next five years, and could show EPS growth rates in double digits over that period. Should Obamacare be repealed, I believe ESRX could deliver upside surprises to forecasted growth rates.