|TheStreet.com, Fall, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
Which investments could and should prosper no matter what the outcome of the debate and potential revisions to the health care reform laws occur?
It’s easy to get distracted. The U.S. is facing a government shutdown while politicians on both sides of the aisle use health care reform, aka “Obamacare,” as a political hockey puck.
No doubt, there are many aspects of Obamacare that could merit reconsideration, and this may or may not happen. Meanwhile, investing decisions need to be made.
In developing an “Obamacare Transition” investment thesis, consider several key components.
First, any investment (this holds true at all times, in my view), must have a reasonable valuation. Second, the investment should have strong growth prospects. Third, the stock should be poised to benefit from the overall economic and demographic trends that are occurring. The latter is particularly important here as demographic trends are predictable and, most importantly, cannot be altered by political views or objectives.
It’s only after an investment makes those three cuts that Obamacare should factor in.
Sectors To Avoid
In my opinion, most investors would be wise to avoid stocks in the following sectors — large franchises, engineering and technology — until there is more clarity in the law. Why? One of the provisions is that any employee working more than 30 hours would be considered full-time for purposes of qualifying under the law. Since most franchises own several stores and have over 50 employees, the costs could be harmful. This group would include Dunkin’ Brands (DNKN) and McDonald’s (MCD).
Franchise companies, such as Starbucks (SBUX), that are growing aggressively on the international scale and earning an increasing share of their profits from overseas, could thrive — at least on a relative basis.
Engineering and technology firms are on the avoid list because of their concentration of highly skilled, highly paid employees — for instance, Oracle (ORCL) and Intel (INTC).
Sectors to Consider
Pharmacy companies and benefit management companies are likely to be two sectors that could profit. Pharmacy companies will likely benefit no matter how Obamacare plays out because of the demographic reality that we are all living longer and consuming pharmaceuticals to help us do so. Rite Aid (RAD) and CVS Caremark (CVS) could all be winners.
By the same reasoning, this would be a great gain for benefit managers such as Express Scripts (ESRX). The sector already handles over 50% of all prescriptions written and that figure is likely to increase in the coming years.
Ultimately, while it is easy to get emotional following the politically charged debates around Obamacare, as investors this also provides opportunities — especially if there is a short-term pullback as a result of a government shutdown related to this argument.